by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Monday, September 29, 2008
The Euro was undermined by stresses within the European banking sector with the authorities forced to partially nationalise Belgian/Dutch banking group Fortis through a EUR16.1bn lifeline. There will also be speculation that the ECB will shift monetary policy and bring forward an interest ratecut, especially with business confidence also continuing to deteriorate.
Despite expectations of congressional support for the US deal, there were renewed stresses as liquidity issues continued. Global central banks were forced to respond with a further massive injection of liquidity into markets. The banks announced that the dollar liquidity swaps would be increased to US$620bn from US$290bn previously.
The lack of liquidity and strong demand for US Treasuries was again an important element in the currency marketsand the effective shortage supported the US currency.
The economic data was overshadowed by political negotiations and the markets were jolted severely again later in US trading as the House of Representatives rejected the US rescue plan. Wall Street weakened sharply while there was further stresses in credit markets.
The Euro recovered sharply to highs above 1.4550 before settling around 1.4450 in very nervous trading. An intensification of fear surrounding the US markets and economy will be offset by strong defensive demand for Treasuries and reduced capital flows with dollar volatility liable to rise sharply.
News of a tentative agreement over the US rescue plan failed to soothe markets as fears over the international banking sector increased again. The Japanese banking sector still looks well placed to avoid the major dislocations which will help support the yen, especially with fears over the US and European outlooks.
Domestically, the retail sales data was subdued with a 0.7% annual increase and the Bank of Japan warned over conditions, although the global trends will tend to dominate.
Fears over the global financial markets and economy will provide important underlying support to the yen in the short term. Following the US political rejection, the yen strengthened further to 104 against the dollar and 150.50 against the Euro.
Over the weekend, the government moved to nationalise and then partially sell off the Bradford & Bingley bank. Confidence in the sector was also undermined by an announcement that the UK banks would be exposed to any substantial medium-term losses on the loan The negative Sterling impact should still be offset by serious difficulties within US and European banks.
There will be further speculation that the Bank of England will move forward an interest rate cut, although the Sterling impact may be lessened by the fact that there will also be growing speculation over a co-ordinated global approach to lowering rates.
The latest UK economic data remained weak with net mortgage lending falling to GBP1.3bn for August from GBP4.0bn previously which will reinforce expectations over serious weakness in consumer spending trends. Sterling dipped to lows beyond 0.80 against the Euro and struggled to hold a recovery above 1.81 against the dollar.
The Swiss franc resisted a significant decline after a US framework deal had been reached over the weekend and then gained strongly during Monday.
The franc was boosted by renewed defensive demand following new serious stresses within the global banking sector as risk aversion failed to ease. The need for government measures to support banks in the UK and Euro-zone was a notable trigger for franc buying with further gains as Wall Street fell after the US package rejection.
There will still be unease over the Swiss financial sector which will limit the scope for franc gains and any evidence of serious difficulties would tend to put strong downward pressure on the currency. The KOF institute also warned that a brief recession was likely.
The franc tested levels beyond 1.57 against the Euro as Wall Street fell sharply and strengthened back to 1.09 against the dollar from lows around 1.1080.
The Australian currency dipped further in local trading on Monday with a decline to below the 0.82 level against the US dollar. Commodity prices were generally lower which will tend to undermine the Australian dollar, especially with increasing risks surrounding the global economy.
Risk aversion has not eased which will limit the scope for Australian dollar buying. The currency dipped again in European trading, especially with industrial metals prices weakening further, while the severe stresses in US markets pushed the currency to 0.80 against the US dollar on a flight to defensive assets.