by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Tuesday, November 18, 2008
The Euro found some support below the 1.26 level against the dollar and pushed to highs of 1.27 as Wall Street secured opening gains. The Euro and US stocks were both unable to sustain opening gains and it weakened back to the 1.26 region.
US producer prices fell by a sharp 2.8% in October as energy prices declined rapidly while there was a higher than expected 0.4% increase for core prices over the month. Given that energy prices have continued to decline, the policy implications should be limited.
The latest NAHB housing index weakened further to a record low of 7 in October from 14 the previous month. The association noted that lenders had pulled back from new financing while consumer confidence had also weakened sharply. The housing starts data will, therefore, be watched closely on Wednesday amid fears of a further downturn in housing activity.
In this environment, there will be additional pressure for fresh policy measures to support the economy and Fed Governor Stern suggested that the Fed Funds rate could be cut to below 1.0% if conditions warrant.
Congressional negotiations surrounding the auto sector will continue to be watched closely while Treasury Secretary Paulson defended the switch of emphasis for the TARP programme. Acrimonious discussions would tend to unsettle the dollar.
There were no significant releases from the Euro-zone over the day and ECB Chairman Trichet stated that CPI expectations are solidly anchored while the ECB will not tolerate inappropriate market behaviour. Markets will continue to expect a further measured interest rate increase by the ECB at December’s policy meeting.
There were further warnings on the economy from Japanese officials with Economy Minister Yosano stating the risk that the economy could contract during fiscal 2009/10. The serious weakness within the global auto sector will also be of source of major concern for Japan’s vital export sector. In this environment, there will continue to reservations over the impact of yen strength.
There is the potential for the Finance Ministry to put pressure on Japanese funds to increase capital outflows to help curb Japanese currency strength. The dollar was close to 96.50 in early Europe as stock-market sentiment remained very fragile.
The yen weakened to lows near 97.50 as Wall Street opened higher, before regaining some ground as stock market gains were reversed and consolidating near the 97 level.
The UK currency pushed to highs near 1.51 against the dollar and 0.8360 against the Euro on Tuesday, but was unable to sustain the gains.
Headline consumer inflation fell to 4.5% in October from 5.2% as energy prices fell sharply while the core rate fell to 1.9% from 2.2%. The larger than expected decline will maintain expectations of further near-term interest rate cuts.
Comments from Bank of England officials will continue to be watched closely and Besley stated that inflation should fall to below the 2% target next year, reinforcing expectations of further interest rate cuts.
Minutes from the November meeting will also be important on Wednesday to assess whether the bank is looking for a further near-term aggressive cut. The voting breakdown will also be important as some members may have promoted a more cautious stance. Any suggestion of heavy political pressure on the bank would be very damaging for the currency.
The Euro again hit resistance close to the 1.52 level against the franc on Tuesday and dipped back towards 1.5150. The US currency retained a firm tone against the franc and challenged fresh 2008 highs near 1.2050, although ranges were relatively narrow.
The latest domestic retail data recorded adjusted sales growth of 2.4% in the year to October. This will reinforce expectations of a sharp slowdown in the economy, but there will be some degree of relief that a steeper downturn was avoided. Financial-sector fears will continue to lessen underlying support for the franc.
The Australian dollar was generally on the defensive in local trading on Tuesday, although it did hold support close to the 0.64 level against the US currency. Domestically, the Reserve Bank minutes from November’s meeting recorded that the bank was more concerned over the need for an urgent policy response in the form of an aggressive interest rate cut. The warning will tend to dampen currency sentiment, although the impact should be measured.
The prime market influence is still likely to be degrees of risk aversion and the stock market performances. The Australian dollar tested levels above 0.65 in early US trading before drifting weaker.