by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Wednesday, September 17, 2008
The dollar was again subjected to very choppy trading during Wednesday with moves were still being driven by wider financial-market trends and overall risk levels.
Immediate fears surrounding creditand equity markets were eased by the Federal Reserve’s US$80bn bridging loanfor insurance group AIG which lessened immediate contagion fears. Underlying concerns persisted, however, with doubts whether AIG would be able to survive in its present structure while wider fears quickly returned.
There will also be further longer-term negative implications for the government fiscal position and ratings agencies started to warn that the US AAA rating could be compromised. Any suggestion of a downgrading would cause substantial damage to the dollar.
Amid the concentration on financial risk, the US data struggled to gains strong attention. There was, however a further downturn in housing starts which fell to an annualised rate of 0.90mn for August from 0.97mn previously. This was the lowest rate since 1992 while building permits also continued to decline. The data will reinforce fears that there could be another downward shift in the economy.
The comments from ECB officials will continue to be watched very closely in the short term with speculation that the bank will need to sanction a cut in interest rates, possibly in a co-ordinated move to reduce global interest rates.
There was a major flight to quality as bond yields fell and gold prices surged, but the dollar failed to benefit and weakened sharply to lows beyond 1.4300 against the Euro in US trading.
The yen weakened in an immediate reaction to the Fed rescue of AIG as risk appetite improved briefly. The Japanese currency was able to resist heavy losses and consolidated around 106.0 in Asian trading.
The Bank of Japan left interest rates on hold at 0.50% following the latest policy meeting and stated that it would seek market stability. There will be some speculation over intervention if the yen renews its advance while the Bank of Japan continued to provide extra market liquidity.
Market fears increased again later on Wednesday, especially as there was a widening in spreads between US treasury and money-market rates. The yen was unable to make strong headway and settled around 105.20 as commodity prices rose sharply.
The UK currency was damaged in European trading on Wednesday as the shares of mortgage lender HBOS came under further heavy selling pressure. Confirmation that it was in merger talks with LLoydsTSB provided some composure and a Sterling rally. The UK currency will gain some support if financial-sector fears ease, although sentiment will remain very fragile.
The UK unemployment claimant count rose by 32,500 in August after a revised 27,800 increase the previous month which will reinforce economic fears. The Bank of England voted 8-1 for unchanged interest rates in September with Blanchflower calling for a 0.50% cut. The minutes suggested the Bank of England was edging closer to a cut, but expectations of looser conditions elsewhere will cushion the Sterling impact.
The latest CBI industrial survey also recorded a further sharp decline to -26 in September from -13 previously which will reinforce a lack of confidence in the economy. Sterling, however, proved resilient against the Euro and rose sharply to highs above 1.82 against the dollar.
Swiss currency retained a firm tone on Wednesday with gains to 1.10 against the dollar and 1.58 against the Euro in very volatile conditions. The franc gained fresh support as equity markets came under fresh selling pressure and there was a wider flight to safety.
With fears over the global bankingsector increasing, the Swiss currency is liable to be unsettled by fears over the domestic banking sector. UBS shares remained under pressure with the government issuing further statements of support.
The National Bank will hold its latest quarterly policy meeting on Thursday. As well as the rate decision, the tone of bank comments will be very important for market sentiment. Any cut in interest rates would tend to weaken the currency sharply.
The Australian dollar pushed back above 0.80 against the US dollar in local trading on Wednesday, but was still struggling to hold the gains. The currency will gain some relief from any easing of risk aversion, although underlying confidence will remain very fragile given that overall stresses have increased.
A renewed surge in risk aversion pushed the Australian currency back to lows near 0.7800 before an equally sharp rally to near 0.80 as the US currency slumped against the Euro. A surge in gold prices during Wednesday also provided support to the Australian currency.