by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Wednesday, September 24, 2008
The dollar again had a tone of consolidationduring Wednesday with markets struggling to find direction as underlying uncertainties and fears continued. The Euro had a slightly softer tone and was unable to sustain gains above the 1.47 level before drifting back to 1.4650.
Central bank efforts to boost dollar liquidity in global markets still had only limited success as Libor ratesremained at elevated levels. There was also a renewed decline in US Treasury bill yields on defensive demand.
The German IFO business confidence index weakened to 92.9 in September from 94.8 previously. There were also negative comments from IFO officials with comments that the decline was proceeding in large steps and calls for lower interest rates. The data will certainly maintain fears over the Euro-zone economy and this will unsettle the Euro, although a weak figure had been expected.
US existing home sales dipped slightly to an annual rate of 4.91mn from 5.02mn the previous month. Prices were significantly lower over the month which will maintain fears over the housing sector, although there is still hope that the market is near a trough as inventories declined.
Fed Chairman Bernanke was generally downbeat over the economic prospects with comments that growth would be likely to be substantially below potential over the second half of 2008. Market stresses could be a considerable drag while commercial real-estate loan conditions had tightened substantially. Bernanke also stated that recent inflation news had been slightly more favourable.
Markets will be uneasy if there is evidence of extended delays to the US financial sector rescue plan, especially as the political considerations surrounding the November election will be an increasingly important aspect.
The yen gained some support on domestic grounds on Wednesday with the quarterly manufacturing survey reporting an improvement to -10 in September from -15.1 the previous quarter. Markets also monitored the potential cabinet choices on Prime Minister-elect Aso with speculation that he would appoint fiscal conservatives which could be a small yen positive factor. Government and Bank of Japan officials remained generally downbeat over prospects.
There was an improvement in risk appetite with Warren Buffett’s Berkshire Hathaway fund taking a stake in Goldman Sachs.There was still a major mood of caution with the US currency consolidating near the 106 level in Asia on Wednesday.
Movement thereafter was limited as uncertainty over near-term direction stifled activity.
Sterling pushed to highs around 0.7880 against the Euro on Wednesday, but was unable to sustain the gains and retreated to 0.7920. The UK currency also again failed to hold above 1.86 against the dollar.
Confirmation of a GBP12bn EDF bid for British Energy should provide some backing to the UK currency via support of the capital account, although the near-term impact should be measured.
The latest CBI retail sales survey recorded a further decline in sales during September with a reading of -27, although the fall was less than the -46 recorded the previous month. Underlying confidence in the domestic economy will remain very weak with comments from MPC members continuing to be watched closely in the short term. Evidence of a consensus over the need for l;ower interest rates would undermine Sterling.
The dollar found support on dips toward the 1.08 level and generally consolidated above the 1.0850 region. The franc drifted weaker against the Euro over the day.
The Swiss franc will tend to lose ground if there is evidence that the US Congress will be able to agree on a financialrescue bill, especially as this would spark a more durable recovery in risk appetite.
The National Bank will continue with money-market injections to provide liquidity which should provide some degree of franc support.
The domestic influences remained limited as attention remained fixed firmly on the US market trends and stresses. Unease over progress surrounding the US bailout plans unsettled the Austrailian dollar to some extent as regional stock marketswere lower.
The overall tone was, however, more measured and the currency edged slightly stronger in local tradingon Wednesday with a move towards the 0.84 level. There was a decline in volatility, although there will still be the risk of erratic trading given that there are still very important underlying tensions.