by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Friday, September 12, 2008
The Euro found support below the 1.40 level on Friday and pushed stronger ahead of the US open. There was further speculation that investment bankLehman would secure a sale over the weekend and this improved risk appetite which eased Euro selling on the crosses. There was also reduced demand for the dollar on defensive grounds as emerging market currencies rallied.
The US economic data was mixed and the impact was generally short lived as market positioning and financial-market trends tended to dominate trading.
The retail sales data was weak with a headline 0.3% decline for August while there was a core 0.7% decline for the month. Auto sales rebounded on heavy discounting while gasoline sales fell sharply. The underlying soft tone to the data will maintain fears over the consumer spending outlook.
In contrast, the University of Michigan confidence index continued to recover in the preliminary September data and this will provide some optimism that economic conditions will improve.
Producer prices fell for August while the latest inflation expectations index also fell which will tend to ease immediate fears over the inflation outlook. This will also continue to dampen expectations of any move by the Federal Reserve to increase interest rateswith some speculation over a cut in rates.
There were no major European releases during the day while the further 0.3% decline in industrial production for July had only a measured impact. The confidence indicators next week will be watched closely to assess whether there is scope for a rebound in the European economy.
The dollar continued to weaken in New York with lows beyond the 1.42, the sharpest one-day fall since March.
Asian stock markets attempted to rally on Friday which curbed immediate demand for the Japanese currency, but regional and global sentiment will remain very fragile in the near term.
Second-quarter Japanese GDP was revised to show a decline of 0.7% from the 0.6% original estimate while the latest industrial output figure was revised up slightly. Global risk aversion trends are likely to remain dominant yen factors in the short term and an easing of immediate fears pushed the yen weaker to 151.60 against the Euro.
There was a further squeeze on long yen positions later on Friday and this pushed the yen weaker to 152.80 against the Euro while the US currency strengthened to 107.60. Immediate yen direction on Monday is likely to be determined by weekend developments within the US financial sector.
Sterling found support on dips below 1.76 against the dollar on Friday and then gained strongly during the day with a peak above the 1.79 level. The UK currency also held firm against the Euro with gains to 0.7925.
There was evidence of a squeeze on short Sterling positions during the day following the heavy selling pressure seen over the past two weeks.
There were no significant data releases while Bankof England MPC member Tucker made mixed remarks in comments during the day. He was concerned over inflation, but also stated that there was a high degree of uncertainty over the situation. Tucker did warn over the inflationary impact of a weaker currency which suggested a reluctance to cut rates. Bond yields rose sharply which provided support to the UK currency.
The consumer inflation data next week will be watched very closely to help assess when the Bank of England might be in a position to cut interest rates.
The dollar was unable to hold above 1.14 against the franc during Friday, but the Swiss currencyunderperformed significantly on the crosses and weakened to lows beyond 1.6050 against the Euro.
Markets continued to watch US financial market developments closely and hopes for a deal on Lehman Brothers, allied with speculation over a possible bid for Washington Mutual, curbed immediate demand for the franc.
European equity markets also rallied strongly later in the day as risk aversion eased and this also curbed support for the Swiss currency in volatile trading.
Despite continuing volatility, the currency retrained a firmer tone in local trading on Friday. There were no significant domestic influences with the Australian currency led by trends in global markets.
The Australian currency was supported by a very tentative recovery in risk appetite over the day as regional stock markets attempted to rally and commodity prices edged stronger.
This trend persisted over the remainder of Friday and position adjustment pushed the Australian currency to highs above 0.8200 as stock markets advanced.