by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Monday, November 17, 2008
There was some disappointment that the G20 summit over the weekend concentrated on a general message of further action rather than announcing any immediate policy initiatives. This dampened any optimism that governments could trigger a rebound in risk appetite and these concerns pushed the Euro towards 1.25 in Asian trading on Monday.
The US data failed to have a major market impact on Monday. The New York manufacturing index edged lower to -25.4 in November from -24.6 the previous month. There will be some relief that there a greater deterioration was avoided, but the index was still at a record low. Industrial production rose 1.2% in October after a downwardly-revised 3.8% decline previously. The recovery primarily reflected the impact of output recovering following the hurricane disruption.
Political negotiations surrounding the US auto sector will continue to be watched closely in the short term and Tuesday’s comments from Fed Chairman Bernanke will also be important. In remarks on Monday, regional Fed President Hoenig warned that he was not comfortable with the current policies and that the Fed should not be a source of subsidised credit. There is certainly a risk that market confidence in the Fed will start to weaken and this would have serious negative dollar implications.
The comments from Bundesbank head Weber were watched closely on Monday, especially as he is a traditional policy hawk. He commented that the inflation threat had eased and that a further rate cut could not be ruled out. Markets will continue to expect a further ECB interest rate cut at the December policy meeting. The Euro pushed to highs above 1.27, but struggled to hold the gains as Wall Street drifted lower.
The yen retained a firm tone in early Asian trading on Monday as the G20 meeting failed to boost investor appetite.
The latest Japanese GDP data recorded a 0.1% decline for the third quarter after a revised 0.9% contraction the previous quarter, confirming that the economy was in recession. There will be further near-term concerns over the economy, especially given the prospect for falling exports. In this environment, markets will remain on high alert over comments by Japanese officials to curb yen strength, although there were no significant comments at the weekend meetings.
The Nikkei index managed to hold its ground on Monday with some evidence of buying by longer-term funds. This buying helped the dollar stabilise around the 97 level against the Japanese currency for much of the day even though risk appetite remained extremely fragile.
The UK currency remained under pressure at close to the 1.47 level against the dollar in early Europe on Monday as sentiment remained extremely weak. After a tentative recovery, the rally gathered pace during the day and Sterling pushed to a high above the 1.50 level. Sterling also recovered to near 0.84 against the Euro with reports of short covering following recent heavy selling.
Political developments will be watched closely in the short term. The row over the opposition Finance Minister’s comments surrounding the risk of a Sterling crisis if the government borrowed too aggressively unsettled the currency to some extent.
There is also likely to be some underlying speculation that the government could consider moving towards Euro entry to help lessen the risk of further Sterling selling even though there would be very serious political and economic barriers to entry.
The Euro found support close to 1.50 against the franc on Monday and pushed back to highs near 1.52. The US dollar also continued to probe resistance levels around 1.20 against the Swiss currency.
The franc will be unsettled to some extent by fears over the Swiss financial sector. Sentiment towards economies where financial services is a key sector has deteriorated and this will tend to be a negative influence on the franc.
The Swiss trends will also be allied closely with trends in risk aversion and the currency will gain defensive support if global equity markets continue to slide.
The Australian dollar weakened to lows below 0.64 against the dollar on Monday before finding some support. The domestic data offered no support with a reported retail sales decline for the third quarter which will reinforce unease over economic trends. The near-term Australian dollar moves are still likely to be dominated by trends in risk appetite and stock markets.
Fears over the global economy will certainly continue and this will maintain the threat of selling pressure on the Australian currency, but it managed to consolidate above the 0.65 region in US trading.