by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Friday, September 26, 2008
The Euro dipped to lows near 1.4550 on Friday and struggled to regain support with selling pressure above the 1.46 level as the currency was unsettled to some extent by weakness on the crosses.
The US University of Michigan consumer confidence index was revised down to 70.3 in the final September reading from the preliminary 73.1 as financial stresses took a toll on sentiment. The final second-quarter GDP estimate was revised down to an annual rate of 2.8% from the previous 3.3% estimate.
There will be further fears that the economy is deteriorating again which will undermine sentiment. Markets will continue to price in an interest rate cut at the October FOMC meeting which will reinforce the lack of yield support. The negative dollar impact will be offset by speculation over co-ordinated global action to lower rates. In the near term, banks will focus more on boosting liquidity in the money markets. Central banks announced another substantial increase in liquidity operations during Friday as market tensions remained severe.
Markets continued to monitor congressional negotiations very closely and the outcome over the weekend will be crucial for trends early next week. An agreement would boost risk appetite and there would be relief, but the overall impact would probably be to weaken the dollar on increased debt fears. Risk aversion will escalate very sharply if there is no deal and there would be major market dislocations.
Sources from the ECB suggested that there was no scope for a co-ordinated interest rate cut at this time, but there will be increased speculation that the bank will shift towards an easier monetary policy by the end of this year. In this context, the ECB council meting and press conference will be very important next week.
The risk of fresh turbulence in global stock markets and continuing stresses in the money markets provided defensive support to the Japanese currency on Friday, especially with a reluctance to push funds overseas.
Domestically, the core inflation rate held at 2.4% in August as energy costs remain at elevated levels. Weak consumer confidence will maintain fears over the Japanese outlook, although global stresses will tend to dominate in the short term. The yen strengthened towards 105.20 on Friday as risk aversion increased.
The dollar recovered back to 106 on hopes that a rescue package deal can be put together and the yen is liable to weaken early next week if there is a cohesive congressional deal.
Sterling dipped to lows near 1.8330 against the dollar and 0.7970 against the Euro on Friday, but it recovered from its worst level with consolidation near 1.84 against the US currency.
There will be further speculation that the Bank of England will move closer towards a near-term interest rate cut, although any negative Sterling impact may be lessened by the fact that there will also be speculation over a co-ordinated global approach to lowering rates.
The Bank of England will be watching survey evidence closely and the PMI data will be very important next week. In the meantime, the UK currency will gain support from any recovery in risk appetite.
The dollar hit resistance above 1.09 against the franc on Friday and consolidated just below this level. The Swiss franc initially gained ground against the Euro, although it ended little changed close to 1.59.
Degrees of risk aversion will be crucial to near-term Swiss currency trends and the franc will advance rapidly on Monday if the US authorities are unable to reach a deal on the financial sector rescue plan.
The KOF index weakened to 0.62 in September from a revised 0.73 reading the previous month and this was a fresh five-year low for the index, although this was better than expected. There will be strong expectations of a slowdown in the economy, but fears over a destabilising slide should ease slightly.
The Australian dollar was put back on the defensive in local trading on Friday and the currency tested lows below 0.8250. A firmer US currency limited support and risk aversion increased again following news that the US financial-fund rescue talks had hit difficulties.
The domestic influences will remain limited in the short term, although underlying fears over the economy will persist. Degrees of risk aversion will continue to dominate in the short term with the Australian currency struggling to gain support from an advance in gold prices. The currency consolidated close to 0.83 in New York as uncertainty persisted.