by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Thursday, November 13, 2008
The Euro dipped to lows just below the 1.24 level on Thursday before finding some support. The German preliminary third-quarter GDP data was weaker than expected with a decline of 0.5% after a revised 0.4% decline previously. This met the definition of recession and there will be a further contraction in the fourth quarter. The ECB monthly report stated that the outlook for price stability had improved further which will maintain expectations of another interest rate cut at December’s council meeting.
Initial US jobless claims rose to 516,000 in the latest week from a revised 484,000 the previous week and this was the highest figure since 2001. Continuing claims also increased further and reached the highest level for over 25 years. The rise in initial and continuing claims suggest both an increase in layoffs and continuing difficulties in finding new jobs.
The trade deficit narrowed to US$56.5bn from US$59.1bn the previous month. There was a decline in exports and imports for the month and the decline in trade volumes will reinforce unease over economic trends. The monthly budget deficit for October was also a record US$237.2bn as spending rose sharply while revenue declined 7.5% over the year. Overall confidence in US assets is liable to deteriorate in the short term, especially with major stresses in the consumer sector and intense pressure in the auto sector.
Wall Street weakened in initial trading, but then found some strong buying support and this helped trigger a further recovery for the Euro with a peak above 1.28. The G20 meetings will be watched very closely over the next 48 hours.
Reports that Japan would supply US$100bn of reserves to help IMF support programmes provided a slight boost to sentiment with the dollar pushing back above the 95 level against the yen in Asia on Thursday.
The yen resisted substantial selling pressure for much of the day as fears over the global economy intensified.
Markets will remain very sensitive to comments from Japanese finance officials, especially if the yen advances again. Japanese Finance Minister Nakagawa stated that there was a need to avoid rapid exchange rate moves at all costs. These comments will reinforce speculation over action to stabilise currencies at the weekend G7 meetings, especially as the Australian central bank supported its currency.
As Wall Street rallied strongly, the yen weakened sharply to lows near 98.10 against the dollar.
Sterling remained under severe pressure on Thursday and weakened to fresh all-time lows against the Euro with a trough beyond 0.8650. The UK currency also dipped to below 1.46 against the dollar, the lowest level for close to seven years, before a rebound to 1.4850.
Overall sentiment towards the economy remained extremely weak as fears over a deep recession continued with a particular focus on announcements of substantial job losses.
Bank of England MPC member Sentance stated that it would take time for the interest rate cuts to take effect and that the bank would consider at the next meeting whether a further cut is required. The MPC are likely to take the Sterling issue seriously, especially as selling pressure has accelerated, and this may trigger a slightly more cautious stance in December.
The franc was again unable to sustain gains through 1.48 against the Euro on Thursday and dipped back to beyond 1.51. The Swiss currency also weakened to fresh 2008 lows near 1.20 against the dollar before rallying back to 1.1850.
There will be further concerns over the Swiss economy in the short term, especially give the serious deterioration in export prospects. The annual producer-prices inflation rate edged lower to 2.9% in October with a 0.6% monthly decline in prices while the ZEW business confidence index remained depressed at -88.5. The easing of inflation pressure and weak growth will maintain pressure for lower interest rates.
The franc will still gain some defensive support if there are renewed stresses in equity markets.
The Australian currency dipped to lows around 0.6350 against the US dollar in nervous market conditions. The Reserve Bank of Australia intervened to support the currency and this helped push the Australian currency back above the 0.64 level.
Sentiment will remain very fragile in the short term, especially with unease over the Australian economic outlook and weak commodity prices will remain a threat. After a further test of support below 0.64, the Australian currency pushed to a high above 0.6650 on wider US currency weakness when there was a powerful rebound in equity prices.