by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commentaryfor Wednesday, September 3, 2008
The Euroretreated to lows below the 1.44 level on Wednesday with fresh 7-month lows around 1.4385, but the US currency was unable to sustain the advance.
Commodity priceswere again an important influence with an initial decline in gold and oil pricesunderpinning the US currency. Prices rebounded in US tradingand this helped push the dollar weaker in with the Euro probing 1.45.
As far as data is concerned, factory orders were slightly stronger than expected, but this did not have a significant influence. The employment data will, however, be watched very closely over the next two days. The ADP report on Thursday may have only a limited impact given that it has consistently over-estimated the monthly payroll data, but Friday’s releases will inevitably be important for market direction.
The Federal Reserve’s Beige Book reported that the economy was generally weak with a retrenchment in spending while labour markets were generally soft or little changed. In these circumstances, the dollar will find it difficult to gain yield support.
Retail sales for the Euro-zone remained weak with a further 0.6% decline for July which reinforced unease over the Euro-zone outlook. The ECB interest ratedecision and, especially the comments from Chairman Trichet, will be very important on Thursday. A dovish stance would put the Euro under renewed pressure.
There was a further unwinding of Australian and New Zealand dollarpositions in Asian trading on Wednesday and this helped maintain a firm yen tone given that the Japanese currency has been a key funding currency. There will be further speculation over capital repatriation back to Japan which will provide underlying yen support.
The currency held steady against the dollar and strengthened to a fresh 5-month high against the Euro with a test of support below 157.0.
Yen volatility was generally higher during the day as high-yield currencies moved erratically. A rally in these currencies curbed immediate demand for the currency, but there were still net yen gains with a move to around 108.20 against the US Dollarin New York.
There was no relief from Sterling selling pressure on Wednesday as consumer confidence remained trapped at four-year lows while the weakness was compounded by further selling of high-yield currency positions.
The UK currency weakened further to below 1.77 against the dollar on Wednesday and remained near record lows against the Euro as underlying selling pressure continued.
ThePMI index for the services sector rose to 49.2 in August from 47.4 previously which will provide some degree of relief over the economy and will make it slightly easier for the Bank of Englandto resist a near-term cut in interest rates.
The Bank of England rate decision will be watched very closely on Thursday. The most likely outcome is that the bank will hold rates steady, but there will certainly be some votes for a reduction and a cut is certainly a possibility. Sterling will be subjected to renewed pressure if there is cut in rates from 5.0%.
Underlying sentiment will also tend to remain weak even if interest rates are left on hold. Sterling recovered some ground against the dollar, but was trapped near 0.8160 against the Euro.
The Swiss francweakened to fresh 7-month lows around 1.1170 against the dollar on Wednesday, but the US currency failed to sustain the gains and weakened to 1.1050 later in New York. The franc gained some further ground against the Euro with a move to near 1.60.
Eastern European currencieswere generally weak and this will tend to support the Swiss currency to some extent in the near term with the potential for funding positions to be closed.
Creditstresses will persist, although this will continue to have a mixed impact on the franc with defensive demand for the currency offset by fears over a sharp slowdown in the Swiss economy as the financial sector remains under pressure.
The Australian dollarwas subjected to fresh selling pressure in local trading on Wednesday with 12-month lows below 0.8250 against the US dollar. The currency was again undermined by a sharp reduction in carry trades as commodity prices were subjected to renewed selling pressure.
The domestic data provided no support to the currency with second-quarter GDP data weaker than expected at 0.3% from a revised 0.7% previously. The PMI services-sector index was also weaker than expected at below 40.0 which will reinforce slowdown fears and overall confidence will remain weak in the short term. There was still a corrective recovery to 0.8350 in US trading after recent heavy selling.