by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Monday, September 1, 2008
The Euro was unable to hold above the 1.47 level against the dollar in Asian trading on Monday and was weaker throughout the day with lows below 1.46, re-testing 7-month Euro lows seen during August.
The dollar was supported by a drop in commodity prices over the day as crude prices dipped to test the US$110 per barrel level. Crude was undermined by reduced fears over hurricane Gustav as its strength was downgraded.
Trading was inevitably subdued later in the day with US markets closed for the Labour Day holiday. The ISM data will be watched closely on Tuesday for further evidence on underlying manufacturing trends, although the payroll data is likely to have a more substantial impact later in the week.
The Euro-zone manufacturing PMI index for August was revised marginally higher to 47.6 from the 47.5 original estimate, but the index remained comfortably below the 50.0 threshold. Speculation that the ECB will maintain a firm stance this week will offer some degree of Euro protection.
Global economic fears remained an important market influence on Monday and concerns over the European outlook provided support to the yen. There will be speculation over a reduction in capital outflows from Japan into high-yield European instruments and this will limit yen selling pressure.
The Japanese currency held firm in Asian trading on Monday with the dollar unable to make significant headway. A sustained break of 160.0 against the Euro also tended to improve underlying yen sentiment on technical grounds.
There will still be domestic interest in selling the yen on strength, but the currency strengthened further to 107.70 against the dollar and 157.80 against the Euro as carry-trade unwinding persisted.
Japanese Prime Minister Fukuda announced his resignation on Monday due to the inability to gain support for political reform. The yen will gain some support on any hopes that a new Prime Minister will be able to push ahead with reform measures, although the overall impact is likely to be limited with a concentration on global credit pressures.
The UK currency was badly damaged again in early Asian trading on Monday following an interview from the Chancellor in the weekend press that the UK economic downturn would be the most severe for 60 years.
Attention will be focussed on economic developments as speculation over an interest rate cut before year-end will continue to build. Sterling weakened to a 29-month low below 1.80 against the dollar and also dipped to a record low against the Euro as confidence in the UK economy and currency crumbled.
The PMI index for the manufacturing sector recovered to 45.9 for August from 44.1 previously which will be a slight relief. Overall sentiment will, however, remain weak, especially as the mortgage approvals data remained at historically very low levels with an annual decline of over 70%.
The dollar traded around the 1.10 level during Monday with the US currency still finding it difficult to sustain a move above this level and consolidating around 1.1010. The franc strengthened against the Euro during the day with a peak close to 1.6050 before a corrective retreat to 1.6090 as European stock markets rallied.
The PMI index weakened to 52.5 in August from 54.1 the previous month which will reinforce expectations of a wider slowdown in the economy, although the slowdown still appears relatively controlled at this stage which should curb aggressive selling pressure.
The Australian dollar dipped further to lows near 0.8520 against the US dollar in local trading on Monday. The second-quarter current account deficit narrowed to AUD12.8bn and was close to expectations which did not have a major impact while the TDMI inflation index edged slightly higher.
The Reserve Bank meeting on Tuesday will be a key short-term focus and the Australian currency will come under further pressure if there is a cut in rates, although the impact be should be measured given that expectations have already shifted.
There is scope for a brief recovery if rates on left on hold at the meeting, but the currency dipped to below the 0.85 level later on Monday as commodity prices weakened.