by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Monday, September 22, 2008
The dollar was unable to secure any great headway in Asiantrading on Monday and was subjected to further selling pressure as support levels beyond 1.45 were broken. International central banks continued to intervene to boost liquidity and an easing of the dollar shortage helped curb demand for the US currency. Commodity prices also moved sharply higher, in tandem with dollar losses, while Wall Street retreated.
The proposed rescue plan for US financial institutions and the purchase of baddebts by a government vehicle remained the dominant focus during the day. The US currency weakened to lows beyond 1.48 against the Euro and this was the steepest one-day decline for over 8 years as uncertainty over the US plans continued.
There will be continuing fears over the US budget implications of the rescue plan, especially as the bailout costs are liable to be at least US$500bn and could be substantially higher. Testimony from Fed Chairman Bernanke and US Treasury Secretary Paulson will be watched very closely over the next few days with both due to appear before Congress on Tuesday.
Medium-term international confidence in the US currency is liable to weaken, especially with an increased risk of a ratings downgrade, although Moody’s reported on Monday that the ratings is unshaken.
There will also be unease over the short-term US impact with further speculation that interest rates could be cut, although there are no major economic releases due over the next 24 hours.
The Euro-zone economic trends have been of secondary importance as financial markets dominated. There will be greater interest over the next few days, especially with the German IFO index due for release on Wednesday while industrial orders will are due on Tuesday.
Risk appetite remained slightly stronger on Monday with regional stock markets rallying. The yen will remain under pressure if global 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.
The Bank of Japan has continued to ease money-market stresses with further liquidity injections to bring over-night rates down, but underlying tensions will persist.
Domestically, the Bank of Japan minutes from August’s meeting reported that US stagnation could be prolonged. The ruling LDP elected Aso to be the new Prime Minister, although the domestic impact should be limited with markets concentrating on US rescue plan developments.
The dollar weakened to lows below 106 against the yen during Monday, although the Japanese currency underperformed against the Euro.
Sterling was unable to sustain gains through the 0.79 level against the Euro on Monday and dipped to lows near 0.7970 as the Euro was sold sharply. In contrast, the UK currency pushed to a three-week high against the dollar with a peak above 1.86.
The Rightmove organisation reported a 1.0% decline in house prices for September, which was in line with recent trends. Although the impact was limited, fears over the housing sector will remain a key focus and the latest mortgage approvals data will be watched closely on Tuesday.
There will also be background fears that the UK will also need to provide additional support to the UK banking sector even though the HBOS rescue was secured with a private-sector bid from LloydsTSB.
Bank of England deputy Governor Gieve reiterated the underlying inflation concerns, although he drew comfort from trends in medium-term inflation expectations while he also warned that deflation risks could also emerge. Expectations of an interest rate cut later this year will limit Sterling support.
The franc found strong support weaker than the 1.10 level against the dollar on Monday and strengthened sharply to highs around 1.07 as US support eroded rapidly. The franc also found support weaker than 1.60 against the Euro and strengthened to just beyond 1.59.
Equitymarkets were unable to sustain an initial advance on Monday which curbed selling pressure on the franc, especially with Wall Street weakening significantly.
Overall market fears should still remain lower which will limit the scope for strong buying support.
Regional stock markets remained stronger on Monday and the Australian dollar consolidated above the 0.83 level against the US currency.
There will still be fears over the domestic and global growth outlook and there will also be unease over the Australian financial sector which will limit support for the currency.
The dollar dipped to fresh lows in US trading while commodity prices rallied strongly and this pushed the Australian currency to a high just above the 0.85 level with volatility still high.