by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
DailyCommentary for Thursday, October 2, 2008
EUR/US$
The Euro remained under pressure ahead of the ECB meeting on Thursday and dipped to fresh 12-months lows below 1.39 against the dollar.
The ECB left interest rateson hold at 4.25% at the latest council meeting. In the press conference following the decision, Chairman Trichet stated that the inflation risks had diminished while the market turbulence had increased.
Despite some warnings over wage developments, the comments overall certainly indicate that the bank has moved to an easier bias. There is a strong possibility that the bank will look to cut interest rates at or before the November meeting.
The US economic data continued the significantly weaker tone seen over the past week. Jobless claims edged high to 497,000 in the latest week from a revised 496,000 previously and this is a level which suggests recessionary conditions. There was also a sharp 4.0% decline in factory orders for August and the recent data has suggested a sudden deterioration in demand. Wall Street weakened sharply and it was notable that the weakness was concentrated in the large industrial stocks. This trend suggests increased fears over the wider economy and will maintain pressure for lower interest rates, especially if there is a very weak payroll report on Friday.
The US Senate passed the Administrations bail-out package and it will now pass to the House of Representatives for the second time with a vote likely on Friday. There will be strong pressure for the bill to be passed and this is the most likely outcome. Another defeat would result in serious dislocations in asset markets and major currency volatility while there will also be some disappointment if the measures are diluted.
Underlying structural dollar demand continued and it consolidated near 1.38 against the Euro while the trade-weighted index was at a 12-month high.
Yen
Even with US Senate approval of the US rescue bill, Asian stock marketsremained generally on the defensive and risk appetite remained generally lower on Thursday which provided underlying yen support.
Any co-ordinated interest rate cuts over the next few weeks would tend to weaken the yen on an improvement in risk appetite, but it retained a firm tone against the dollar on Thursday. The Japanese currency was also strong on the main crosses as the Euro dipped to fresh 12-month lows below 145.
The yen retained a firm tone in New York as Wall Street was sharply weaker with the dollar unable to push far from the 105 level.
Sterling
The construction PMI index remained very weak in September at 38.8 while the Bank of England reported that credit conditions continued to tighten for the latest quarter. There were also expectations of a further tightening for the current quarter.
Expectations that the economy is in recession will continue and the Nationwide reported further house-price declines for September.
There will be strong pressure on the Bank of England to move quickly towards an interest-rate cut, especially if there is sharp deterioration in Friday’s services-sector PMI report. The potential negative impact on Sterling will be offset by expectations that the ECB will cut rates in November while there will also be speculation over co-ordinated action to cut rates.
Sterling dipped to lows around 1.7550 against the dollar, but strengthened to a 7-week high against the Euro with a peak close to 0.7825. Wider Sterling strength is unlikely without an improvement in banking-sector sentiment.
Swiss Franc
The Swiss franc remained under pressure against the dollar and dipped to lows beyond 1.14 before a corrective recovery to 1.1350. The Swiss currency took advantage of Euro weakness and strengthened to 1.5670 before consolidating around 1.57.
The National Bank stated that 2009 growth would decline substantially from 2008 levels which will reinforce speculation over an interest rate cut.
Immediate franc demand is liable to weaken slightly if the US financial rescue bid is passed in Congress, although underlying stresses are liable to continue.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar will continue to be unsettled by fears over the global growth outlook which will tend to put further downward pressure on commodity prices. The impact will be lessened to some extent by the fact that Australia reported a firm trade surplus for the latest month.
There will also be further strong expectations that the Reserve Bank of Australia will cut interest rates next week, although there will also be expectations of global action to cut rates. The Australian currency will need a strong improvement in risk appetite to make much headway and it dipped to lows near 0.77 in New York as stock prices fell.
