by Darrell Jobman, Editor-in-Chief TraderPlanet.com
Commenary for Monday, September 8, 2008
Over the weekend, the US Administration announced a Federal support package and effective takeover for the US mortgage finance companiesFannie Mae and Freddie Mac. The move offers some hopes or a stabilisation in the US housing sector as there should be scope for a decline in mortgage ratesas risk eases. The rescue will also help ease immediate fears over the global financial system.
In the near term, overall dollar confidence in the US economy is, therefore, liable to remain firmer which will help support the currency to some extent.
There will still be underlying unease given the doubts over consumer spendingtrends while there will be increased fears over the budgetdeficit. The fiscal strains will pose very important longer-term dollar risks as there is liable to be heavy new issuance to support the mortgage companies. The underlying fiscal position is also already deteriorating due to economic weakness and there will be further important stresses within the bankingsector.
The Euro-zone Sentix investor confidence index continued to weaken for September with a dip to -20.2 from -15.3 previously which will maintain fears over the Euro-zone economy.
The US currency regained ground strongly during the day as underlying sentiment remained stronger. It advanced to fresh 2008 highs near 1.4055 against the Euro while the dollar also strengthened to a 12-month high on a trade-weighted basis.
The US Federal bailout of the mortgage finance companies was important in improving risk appetite in Asian tradingon Monday with regional stock marketsrising strongly. This rally in markets weakened the yen significantly as the immediate pressure for a liquidationin carry trades eased with financialstocks rallying strongly.
The yen weakened to lows around 109.00 against the dollar and to beyond 156.50 against the Euro. Higher volatility is liable to remain a key short-term market feature due to underlying uncertainty over regional and global trends.
The Japanese currency regained ground in US trading on Monday with some support as Wall Streetfaded significantly from initial gains while there was little follow through in carry trades.
The Japanese currency strengthened back to near 152.20 against the Euro.
Risk appetite recovered on Monday following the US GSE bailout and this pushed Sterling stronger as there was an improvement in risk appetite with a peak above 1.79 against the dollar.
UK input producer prices fell 2.0% in August after a revised 1.4% decline the previous month while output prices also fell over the month. The data will maintain expectations of a decline in inflation pressure and the medium-term potential for sharply lower interest rates. The impact will be limited, especially as Sterling has fallen since the data was compiled, but underlying confidence will remain very weak.
The UK currency weakened sharply against the dollar with fresh 30-month lows below 1.75 before a small correction as the US currency continued to punish European currencies. Sterling was little changed against the Euro near 0.8050.
The franc weakened on Monday following the US moves to take over the mortgage companieswith a move back to 1.6050 against the Euro as risk appetite improved. The franc also weakened to 1.1315 against the dollar, but recovered from the worst levels as markets were unconvinced over underlying global economic trends.
The franc pushed back to 1.5960 against the Euro as Wall Street faded from initial levels.
The seasonally-adjusted Swiss unemployment rate was unchanged at 2.5% in August according to the latest data which will not have a substantial impact with expectations of an underlying slowdown intact. Comments from National Bankofficials will remain under close scrutiny in the short term.
The Australian dollarjumped higher in local trading on Monday as there was a recovery in risk appetite following the US mortgage-finance companies takeover.
The Australian currency will gain near-term support from any sustained recovery in risk appetite, although underlying fears will persist which will trigger further erratic currency moves. Domestically, Reserve Bank Governor Stevens stated that there was no rush to cut interest rates further which also provided some degree of currency support.
The Australian dollar peaked close to 0.8350 againstthe US dollarand then weakened sharply with a test of levels below 0.81 in US trading as the Euro was subjected to renewed selling pressure.