by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Tuesday, September 2, 2008
After failing to break back above 1.46 on Tuesday, the Euro retreated to a fresh 7-year low below 1.45 against the dollar beforeconsolidating just above this level.
Energy prices were again an important catalyst for currency moves with a sharp drop inoil pricesto lows below the US$105 per barrel level providing support to the dollar.
The US ISM index for the manufacturing sector was little changed in August with a marginal decline to 49.9 from 50.0 the previous month. The employment index retreated back to below the 50.0 level while the prices component was also weaker.
Following the data, there was some easing in expectations that the Federal Reserve would look to increase interest rates over the remainder of 2008. Overall yield support for the US currency has not improved relative to German bunds and this will limit the scope for further aggressive dollar buying.
Despite fears over the Euro-zone economy, there is likely to be further caution ahead of the ECB policy meeting on Thursday. The tone of comments from ECB Chairman Trichet will be watched very closely and will have a key impact on Euro sentiment. The Euro will be subjected to renewed selling pressure if there are any hints over a near-term cut in interest rates.
The yen will gain some support on any hopes that a new Prime Minister might be able to push ahead with reform measures, although the overall impact is likely to be limited with a concentration on global economic and credit pressures.
There was further weakness in Asian stock markets during Tuesday which will tend to provide some degree of support to the yen with pressure to curb carry trades, especially if commodity prices weaken further. The yen was close to the 108.0 level in early Europe and holding firm against the Euro. Bank of Japan Governor Shirakawa reinforced his message over uncertainty in the Japanese economy, but the impact was limited as weakness has been priced in.
The yen initially remained firm on the crosses, but the Japanese currency lost ground in early UStrading as stock markets were generally stronger. Wall Street was unable to hold the gains and the dollar also retreated from highs around 109.15.
The UK currency weakened further to lows below 1.79 against the US dollar in Asian trading on Tuesday with Sterling also at fresh record lows near 0.8140 against the Euro.
The government announced some measures to support the housing sector including a reduction in house-purchase tax for the next 12 months, but market sentiment remains extremely negative towards the economy and currency.
The constructionPMI index pushed back to 40.5 in August from 36.7 previously which will provide marginal degree of relief. The services-sector PMI data will be watched very closely on Wednesday, especially as it will be a key indicator for the Bank of England. A weak headline reading, allied with a drop in the prices component, would increase pressure for a cut in interest rates as soon as possible.
Sterling dipped to a 30-month low below 1.78 as the dollar strengthened before consolidating just above this level.
The Swiss franc weakened to fresh 6-month lows beyond 1.11 against the dollar and also dipped to 1.6110 against the Euro before securing some renewed support.
August consumer inflation edged down to 2.9% from 3.2% previously. GDP growth for the second quarter was above expectations, but markets are focussing on future trends which limited the impact.
National Bank member Jordan stated that inflation should ease significantly over the next few months and this will maintain some expectations that the bank will resist any increase in rates and move towards a monetary policy relaxation by the December meeting.
The Reserve Bank cut interest rates by 0.25% to 7.00% following the latest policy meeting, in line with market expectations. The statement from the bank was slightly tougher than expected which provided some immediate relief to the Australian currency, but selling pressure quickly returned.
The Australian currency was undermined by a renewed decline in commodity prices and fears over the housing sector were also a negative influence as there was a further 2.3% monthly decline in building approvals.
Commodity prices remained a key market influence and the Australian dollar weakened to lows below 0.83 against the US currency as oil prices came under heavy selling pressure before a recovery to 0.8380.