The Euro spiked higher in US trading following the data releases with a peak just above 1.28. The Euro then dipped sharply again to lows below 1.2550 as Wall Street weakened again with the main US indices testing five-year lows.
Headline US consumer prices fell a larger than expected 1.0% for October as energy costs dipped sharply and this was the largest monthly decline for over 40 years. There was also a 0.1% reduction in core prices which cut the annual increase to 2.2%. The data will maintain deflation fears, although the prime influence was the fall in energy costs rather than a more general downward pressure on prices.
Housing starts continued to decline in the latest month with an annualised rate of 0.79mn from 0.83mn previously while building permits data recorded a steeper decline to the 0.71mn level. Both data sets declined for the fourth consecutive month and recorded an annual decline of over 30% to record lows.
Minutes from late October’s FOMC meeting continued to indicate a downbeat Federal Reserve assessment of the economy with expectations that the economy would contract until the middle of 2009. The minutes also saw the potential for further interest rate cuts. Markets will continue to monitor developments surrounding a support package for the auto sector.
There were reports that the EU will consider a fiscal expansion plan of EUR130bn, although this was formally denied by the European Commission. Definite plans could boost the Euro to some extent, although economic fears will also continue.
The Japanese currency edged stronger on Wednesday due to a persistent lack of confidence in the global economy as growth warnings have continued throughout all major economies.
Markets will remain very sensitive to official comments from Japan, especially as the latest trade data is likely to reinforce fears over the export outlook. The Finance Ministry may continue to encourage capital outflows to ease upward pressure on the yen. The dollar briefly pushed to a high above 97 against the yen before moving back to test levels below 96 in New York as moves remained correlated strongly with trends in stock prices.
The UK currency dipped lower following the MPC minutes on Wednesday, but then rallied strongly and pushed to a high above 1.52 against the dollar before retreating back to below 1.50. Sterling rallied to stronger than 0.84 against the Euro.
The Bank of England MPC committee voted 9-0 for the 1.50% November rate cut. The MPC indicated that cuts of at least 2.00% would be needed to meet the revised forecasts for the economy, but they were wary of cutting by such a substantial margin in one move, especially given the threat of a very negative Sterling reaction.
These comments will maintain expectations of a further cut of at least 0.50% at the December meeting, but it may dampen expectations that the bank will cut by a further 1.0%. Sterling resisted heavy selling after the minutes given that further near-term cut of 1.0% was effectively already priced in.
The CBI industrial survey remained depressed with the orders component little changed while output levels continued to fall sharply and there is little prospect of immediate relief for the economy which will maintain weak sentiment.
The Swiss franc remained under pressure on Wednesday and dipped to lows beyond 1.53 against the Euro before a recovery back to 1.5220. The franc also weakened to fresh 2008 lows against the US dollar with a trough close to the 1.2150 level.
Fears over the domestic economy are continuing to increase with increased speculation over recession which is unsettling the Swiss currency. Unease surrounding the banking sector remains a particularly important focus and confidence is liable to remain fragile in the short term.
The Australian dollar re-tested support close to the 0.64 level against the US currency on Wednesday. The domestic lack of confidence persisted with generally downbeat comments from Reserve Bank officials with a warning of recession risks. Bank Governor Stevens also stated that the bank had room for manoeuvre on interest rates.
The Australian currency will continue to struggle on serious global growth fears unless there is a sustained recovery in stock markets and improvement in risk appetite. After a brief move to near 0.66, the Australian currency weakened back to 0.64 as Wall Street was subjected to renewed selling pressure.