by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Commentary for Wednesday, November 12, 2008
The Euro was unable to push above the 1.26 level in Europe on Wednesday and weakened to test lows below the 1.25 level as the US dollar gained fresh defensive support.
The Euro-zone data recorded a decline in industrial output for the latest month, although the impact was limited as the data from individual countries had already indicated a sharp decline in production. The comments from ECB officials continued to suggest that interest rates would be cut further.
There were also some expressions of serious concern over the situation with ECB member Stark, for example, warning that the financial crisis was wrecking havoc and that it was difficult to assess the economic outlook. The ECB is still likely to prefer a measured policy stance given the longer-term focus on stability.
The dollar was undermined to some extent by comments from US Treasury Secretary Paulson who indicated that the TARP funds may be used more to easing stresses related to credit cards rather than on buying distressed mortgage-related assets from the banking sector.
The Euro did initially manage to recover from lows below 1.25 even though Wall Street was sharply weaker which may indicate that US currency sentiment is starting to weaken slightly, but the Euro was pushed back below the 1.25 level later in the US session.
There has been further unease over the global economy during the past 24 hours which has lessened interest in carry trades and also curbed selling pressure on the Japanese currency, especially with the Nikkei index weakening again on Wednesday.
There was also renewed speculation over the need for yen buying to protect derivatives contracts. As equity markets came under renewed selling pressure, the Japanese currency tested dollar support below the important 95 level.
The dollar secured some respite on speculation that there could be verbal intervention to restrain the yen. Markets will remain very sensitive to comments from Japanese finance officials, especially if the yen continues to advance over the next few days, and the dollar weakened again late in US trading.
Sterling remained subdued in early Europe on Wednesday and, after some temporary relief, the UK currency weakened sharply. Sterling weakened to all-time lows near 0.84 against the Euro and also dipped to below 1.50 against the dollar which was the lowest level for over six years.
The UK unemployment claimant count rose by a 36,500 in October after a revised 36,300 increase previously. There was some relief over the headline number as it was below expectations, but the impact was offset by a higher revision and the employment total was at the highest level for 11 years.
In the quarterly inflation report, the Bank of England took a very negative attitude towards the economy with Bank Governor King warning that it was already in recession with an important risk of a serious recession. The bank lowered its inflation forecasts and stated that it was likely to be below the 2.0% target level on a two-year view if interest rates were held at current levels.
These forecasts imply that interest rates will be cut again in the short term with markets expecting another substantial rate reduction at the December MPC meeting. King also stated that Sterling weakness was not surprising, although he also warned that the bank would need to take import costs into account when determining the appropriate level of interest rates.
The report overall will maintain a very negative sentiment towards the UK economy and currency in the short term.
The Swiss franc gained ground against the Euro on Wednesday as risk appetite deteriorated further. The franc strengthened to highs near 1.47 before retreating back to beyond 1.48. The franc weakened to lows near 1.19 against the dollar with the US currency again probing 2008 highs.
The franc will continue to gain some defensive support if there are further stresses within equity markets, especially as confidence in the global economy has continued to deteriorate.
The Australian dollar was unsettled by renewed selling pressure on global stock markets and increased fears over the global economy as underlying stresses persisted. Although there was a recovery in consumer confidence according to the latest Westpac index, the domestic influences were limited.
The Australian dollar edged back towards the 0.66 level in Europe on Wednesday as European bourses attempted to rebound, but was unable to sustain gains. It retreated to lows near 0.6350 as US equity markets were subjected to renewed selling pressure and risk appetite dipped again.