by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Friday, October 31, 2008
The Euro dipped sharply against the dollar in Asian trading on Friday and tested lows below the 1.27 level as it failed to hold the recent gains. A further decline in dollar funding rates should curb immediate demand for the US currency.
The US economic data releases remained weak with a particularly sharp decline in the Chicago PMI index to 38.7 in October from 56.7 the previous month. The index had held surprisingly firm over the past few months, but the sudden decline to a 7-year low will trigger renewed alarm over the manufacturing sector.
The national ISM data will, therefore, be watched very closely on Monday amid fears over a further sharp deterioration. Elsewhere, the University of Michigan consumer confidence index held little changed near all-time low in the October final reading while consumer spending was subdued.
The Euro-zone economic data was close to expectations with the provisional inflation rate falling to 3.2% from 3.6% the previous month while unemployment held steady at 7.5%. There was a sharp decline in the latest German retail sales report, although the series is erratic.
There were a series of significant comments from ECB officials on Friday. Bini-Smaghi stated that interest rates should not be set too low and this suggests that the bank will be cautious over the situation even if though there is still a strong probability of a cut next week. He also stated that the Euro’s decline against the dollar and yen should be a temporary factor relating to adjustment in loan positioning.
The Bank of Japan cut the main interest rate by 0.20% to 0.30% compared with expectations of 0.25% reduction. There was a tied vote for the move with Governor Shirakawa casting the deciding vote. Some members wanted a sharper decline in rates while some wanted rates to be held steady and there may have been strong government pressure for the move to lower rates.
Official policy actions will also be watched very closely as there is still the possibility of intervention to stabilise the Japanese currency. The economic data remained generally weak with the PMI index at a 7-year low, although unemployment registered a fall.
Regional equity markets were weaker on Friday as underlying fears persisted. The yen initially regained some ground with a move to 97.50 against the dollar, but it settled around 98.50 after a brief dollar spike to above 99 and an easing of fear should curb yen support.
The UK currency dipped sharply against the dollar in Asian trading on Friday with a corrective retreat to below 1.62 after sharp gains over the previous 48 hours. Sterling also failed to hold the best levels against the Euro.
There were no significant data releases during the day which allowed interest rate expectations to dominate. There was increased speculation that the Bank of England could sanction a sharp cut in rates of 1.0% to help stabilise economic conditions.
The UK data will be watched closely next week as the PMI confidence indicators could be critical in determining how aggressively the central bank cuts interest rates. Any signs of resilience would encourage a more cautious Bank of England stance.
The franc resisted a decline through the 1.17 level against the dollar on Friday, but remained generally on the defensive while the franc also had a weaker tone against the Euro with losses to near 1.48. A slight easing of risk aversion lessened safe-haven demand for the franc while there were also domestic concerns.
The KOF leading index weakened further than expected to 0.35 in October from a revised 0.52 the previous month and this was the weakest reading for over five years which will reinforce fears over a sharp slowdown in the economy.
There will be additional pressure on the National Bank to sanction a near-term cut in interest rates which will curb franc support.
Underlying risk appetite is still very fragile which hampered the Australian currency and there was renewed downward pressure on metals prices which also undermined the currency. From highs near 0.69, the Australian dollar weakened to lows below the 0.66 level on Friday.
Volatility will remain high in the short term and there will be further unease over the global economy as recession bites. The concerted move to cut interest rates, allied with an underlying easing of credit pressures, should still provide some underlying support to the Australian dollar and it settled around 0.6650.