by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Friday, September 19, 2008
The US and global financial-market trends continued to dominate markets on Friday. Following reports that the US authorities were looking to establish a rescue fund for bad debts within the banking sector, the dollar advanced in Asian trading on Friday.
The US Treasury confirmed that it would set up a vehicle to buy bad mortgage-related debts from the banking sector with congressional leaders due to meet over the weekend to finalise details. There will be greater optimism that the authorities will finally be able to alleviate stresses within the markets and underpin the banking sector.
The US currency retained a firm tone in early Europe on Friday, but then weakened sharply. The Euro secured strong gains against the Japanese yen as risk aversion eased and this also put upward pressure on the Euro against the dollar. As stop-losses were triggered, the trend accelerated in New York.
The US Federal Reserve also confirmed that there would be additional support measures for the US financial sector with the Fed extending loans to buy asset-backed commercial paper to safeguard money-market funds.
As well as trends in risk aversion, there were fears over the cost of the bailouts. Treasury Secretary Paulson confirmed that the cost would likely to be hundreds of billions of dollar and could be as high as a trillion dollars.
There will be increased fears over the US budget implications and medium-term confidence in the US currency is liable to weaken, especially with the risk of a ratings downgrade. The dollar weakened to lows beyond 1.4450 in US trading and any congressional barriers to the plans could trigger another reversal in sentiment on Monday with further volatility.
US plans to ease the financial crisis sparked a strong rally in regional asset prices on Friday. These gains sparked renewed yen losses with the dollar strengthening towards the 107.0 level in early European trading.
Money-market conditions were still very tight as underlying stresses continued with central banks adding additional funds. There will also be major caution over the situation with underlying pressure for a de-leveraging of funds liable to continue.
The dollar pushed to highs around 107.70 as stock markets rallied strongly before edging back to 107 while the yen weakened to near 155 against the Euro.
The yen will remain under pressure if risk appetite remains stronger, but there will still be underlying unease over growth prospects which should prevent aggressive selling, especially with increased doubts over US fundamentals.
Sterling was being driven primarily by global trends on Friday as the US proposals took centre stage. The UK currency initially lost ground against the dollar, but volatility remained a key feature and Sterling reversed losses later in Europe.
Strong gains in the global financial sector will be a positive influence. The UK government also announced that it would provide funds to support the UK banking sector. There will, therefore, be reduced fears over financial companies which will underpin Sterling in the near term.
There will still be substantial fears over UK economic trends as the financial-market stresses have tended to divert attention from domestic growth indicators. Attention may return to the underlying economic trends next week if there is any stabilisation in asset markets and this could unsettle Sterling.
The Swiss currency lost ground against the major currencies on Friday as risk appetite returned. The franc dipped to lows around 1.6030 against the Euro and initially dipped to 1.1280 against the dollar. The franc recovered from its worst levels against European currencies and also pushed to 1.1030 against the dollar as the US currency came under pressure.
The Swiss National Bank continued to add liquidity into the markets to help alleviate stresses as the money markets remained very tight.
The franc will lose defensive support if there is a sustained recovery in risk appetite, although volatility levels are liable to remain elevated. The underlying economic stresses should limit the extent of selling pressure.
The Australian dollar recovered strongly in late US trading on Thursday as risk appetite improved with a sharp rally on Wall Street. The currency retained a firmer tone in local trading on Friday and strengthened to highs above the 0.81 level against the US dollar.
There will still be unease over underlying financial-market trends and confidence in global growth will remain weaker which will limit the scope for strong support.
A weaker US currency and a strong rally in commodity prices were still the dominant short-term influences and the Australian dollar accelerated to highs above 0.83 in New York.