by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Monday, September 15, 2008
After dominating sentiment on Friday, US financial developments were even more critical on Monday as major turmoil persisted. After failing to reach a sale agreement, Lehman Brothers announced that it would file for bankruptcy. Fellow investment bank Merrill Lynch also agreed a deal to be taken over by the Bank of America.
Global banks announced a US$50bn liquidity pool to help an orderly unwinding of Lehman positions while the Federal Reserve relaxed collateral conditions to support wider market liquidity.
From lows beyond 1.44, the dollar then recovered strongly back to below1.4100 as the Euro suffered on the crosses and volatility remained very high. The US currency drew important safe-haven support with a further repatriation of funds and safe-haven bids for US Treasuries.
The Euro was also undermined by speculation that the ECB could sanction an emergency cut in interest rates.
The US data provided no support for the US currency with the New York Empire manufacturing index dipping back to below zero level with a decline to -7.4 from 2.7 the previous month. There was also a 1.1% industrial production decline for August which will reinforce industrial-sector fears.
US consumer inflation data will be watched closely on Tuesday, although the financial turmoil and underlying economic risks are liable to dominate the scheduled FOMC meeting. There was further speculation that the Fed will move back to an easing bias which unsettled the dollar and it dipped to 1.4300 later in New York as Wall Street fell sharply.
The failure of Lehman Brothers increased risk aversion sharply on Monday which also strengthened the yen. Japanese markets were on holiday which increased volatility, although Bank of Japan suggested that it would act to stabilise markets as required.
There were renewed fears over an unwinding of carry trades given the US financial stresses. This pushed the yen sharply stronger against the US currency with a move to highs beyond 105.00, the sharpest one-day decline for 6 years.
The yen corrected some strength later in the day, but underlying sentiment will tend to remain firm given financial fears. Speculation over a further underlying de-leveraging in global markets will also tend to support the Japanese currency.
The UK currency gained further support from US currency vulnerability on Monday, although it retreated rapidly from a peak above 1.81 as the dollar regained ground. Sterling held relatively firm against the Euro.
Fears over the financial sector were a negative influence for the UK currency. Although the major UK banks were still being bolstered by action earlier this year to boot balance sheets, Sterling will still tend to struggle while banking-sector risk remains so high.
The consumer inflation data on Tuesday will be watched very closely to assess UK interest rate prospects. Bank of England Governor King will also have to write another letter to the Chancellor explaining the action which will be taken to bring inflation back to the 2.0% target.
A dovish stance from King would put renewed downward pressure on Sterling with volatility liable to remain at extreme levels.
Swiss franc secured renewed support on Monday from a sharp increase in risk aversion. In particular, the credit-default spreads moved sharply high which boosted the currency. The franc strengthened to 1.5870 against the Euro and consolidated at an 11-day high against the dollar near 1.1120.
The domestic data recorded an underlying annual 2.3% increase in retail sales for July while producer prices fell 0.5% in August which cut the annual increase to 4.0%. Markets will remain on high alert for comments on interest rates from the National Bank ahead of Thursday’s meeting.
There will also be renewed unease over the Swiss financial sector which will tend to limit franc support.
There was a further surge in volatility in local trading on Monday following Lehman Brothers announcement that it would seek bankruptcy protection. Risk aversion increased again which weakened the Australian currency with a dip back to below the 0.82 level.
Domestically, the housing starts data was weaker than expected, although the dominant near-term influence is likely to be global market conditions. The Australian currency will be unsettled by fears over a further downturn in credit conditions and it retreated to near 0.80 in Europe. There should still be pressure to correct underlying over-sold conditions and there was support close to the 0.80 level.