by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Tuesday, September 16, 2008
The dollar gained safe-haven support when fear intensified with advances on the crosses. In this context, the dollar paradoxically tended to react negatively to reports that there would be Fed or government support for AIG as the insurance company tried to stave off collapse.
US consumer prices fell 0.1% in August after a 0.8% increase previously while core prices rose 0.2% over the month for a 2.5% annual increase. The data will maintain some optimism that inflationary pressure is peaking, although the impact will be measured given the concentration on financial risk.
The latest Treasury capital inflows data recorded net long-term outflows of US$7.1bn for July compared with inflows of US$53bn previously. This will maintain unease over underlying trends, although the impact will be cushioned by the fact that there have been recent defensive inflows.
The Federal Reserve left interest rateson hold at 2.00% following the latest FOMC meeting. This was in line with expectations, although futures markets had moved to price in over a 50% chance of a rate cut. The Fed remained concerned over inflation in the statement, but it also sounded a more cautious note on growth and recognised the increase in financial stresses. There was some further speculation over a cut at the November meeting.
The German ZEW index improved to -41.1 in August from -55.5 previously which will offer some relief and underpin the Euro, although the impact will be lessened by the fresh surge in financial risk.
From lows around 1.4280, the dollar strengthened to beyond 1.41 following the FOMC decision before a retreat to 1.4150. It will struggle to secure strong support given renewed economic fears.
Speculation over a further underlying de-leveraging in global markets continued to support the Japanese currency on Tuesday with the potential for capital repatriation and an unwinding of Australian and New Zealand dollar positions.
The Bank of Japan provided additional liquidity as regional stock markets fell sharply while the Nikkei index fell by over 5.0% to 3-year lows.
The dollar tested lows near 103.50 against the yen there will be some speculation over intervention to restrain the Japanese currency if it continues to advance.
The yen retreated significantly later in US trading with speculation over an AIG rescue package lessening near-term yen demand in volatile conditions and the dollar advanced to 106.30.
Sterling was unable to push back above 1.80 against the dollar on Tuesday. UK consumer inflation rose further to 4.7% in August from 4.4% previously while the core rate rose to 2.0% from 1.9%.
In its inflation letter to the Chancellor, the Bank of England was slightly more concerned over the inflation outlook even though it expects the headline rate to peak soon. It stated that the MPC was firmer in its belief that muted growth would be needed to control inflation while there were increased references to the inflationary impact of Sterling weakness.
The overall tone was slightly stronger than might have been expected. Markets will still be looking for interest rates to be cut late this year, but expectations of sharp cuts may fade slightly.
The UK currency weakened to lows beyond 0.7980 against the Euro before recovering back to 0.7920.
Swiss currency advanced further in European trading on Tuesday as equity markets remained under heavy selling pressure. The franc strengthened to near 1.5750 against the Euro and 1.1050 against the dollar.
National Bank member Hildebrand stated that the central bankswere ready to secure financial stability and the bank offered a further injection of money-market funds at 1.9%.
The franc retreated from its best levels as hopes for an AIG support package increased. The Swiss currency was also unsettled by fears over the domestic banking sector as UBS shares weakened sharply with a retreat to 1.1240 against the dollar.
The Australian dollar retreated sharply to lows below 0.79 against the USdollarin local trading on Tuesday. The currency was undermined by a renewed surge in risk aversion as equity-market and credit fears increased.
The Reserve Bank minutes from September’s meeting confirmed that the bank was confirmed over a sharp slowdown in the economy, although the impact was over-shadowed by a switch in focus towards the potential for further near-term cuts to support the economy.
The Australian dollar was also undermined by a decline in commodity prices as growth fears increased. Risk aversion will remain very high, but the currency edged back to above 0.80 in US trading.