by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary Monday, November 3, 2008
EUR/US$
The Euro pushed to highs near 1.29 against the Euro in late Asian trading on Monday, but was unable to sustain the gains and weakened steadily with a decline to test lows below 1.2650.
Although dollar Libor rates have continued to decline, dollar demand is still at elevated levels. The US currency is also still in the paradoxical position of gaining support against the Euro on bad US economic news, especially with fears over another round of credit de-leveraging.
The Monday US data certainly reinforced fears over the economic trends. The national ISM manufacturing index dipped sharply again to 38.9 in October from 43.5 previously. This was the lowest reading since 1982 and is at a level which is consistent with a recession for the economy as a whole. There will be particular unease over a sharp deterioration in the orders and employment components while the inflation reading also dipped substantially.
The data will increase fears over Friday’s payroll report, especially if there is a sharp deterioration for the services-sector index as well. In this environment, markets will continue to price in further interest rate cuts by the Federal Reserve even though rates are already down to 1.0% and this will hamper the dollar.
The weak US data will maintain fears that the European economy will also weaken sharply and the EU Commission lowered its forecasts for the economy with a gloomy assessment for 2009. There will also be strong expectations that the ECB will cut interest rates again at this week’s meeting.
Yen
Asian stock markets rallied on Monday and there was a general improvement in regional confidence while dollar funding costs continued to decline. Liquidity levels were relatively low, especially as Japanese markets were closed for a holiday.
The Japanese currency weakened to 99.50 against the dollar on Monday as risk appetite improved and the yen performance on any move to near the 100 dollar resistance level will be watched closely. G7 comments on currencies will also remain important for market sentiment.
The dollar edged back towards the 99 level in New York and the yen also secured some considerable respite on the crosses.
Although the immediate financial risks have declined, the economic risks remain extremely high with global PMI indicators continuing to weaken. These economic fears will tend to limit the potential for yen selling as caution will prevail.
Sterling
The UK currency initially pushed back above 1.6300 against the dollar on Monday as overall risk appetite recovered.
The PMI index for the manufacturing sector edged stronger to 41.5 in October from a revised 41.2 which may provide some slight relief. Wednesday’s services-sector data will probably be more important for markets and the bank given its vital role for the economy as a whole.
Volatility remained high and Sterling then fell steadily over the day with lows below 1.5850 against the dollar and beyond 0.80 against the Euro before a slight recovery.
Despite the PMI report, the Sterling was damaged by expectations that the Bank of England could cut interest rates by as much as 1.0% at this week’s policy meeting.
Swiss Franc
The franc was unable to sustain gains through the 1.15 level on Monday and dipped to lows beyond 1.17 in New York as the US currency regained ground. The franc was generally weaker against the Euro, although it recovered from lows near 1.49.
The PMI index for the Swiss economy was firmer than expected with a reading of 47.0 for October from 47.8 previously, although this still represented a fresh 66-month low for the index.
Overall sentiment towards the franc was weaker over the day with increased speculation that the National Bank will sanction a rate cut ahead of the next scheduled meeting.
The speculation was fuelled by generally downbeat comments from the bank officials with Chairman Roth stating that he was now more concerned over the economy than a few weeks ago.
Source: VantagePoint Intermarket Analysis Software
Australian dollar
The Australian dollar challenged levels above the 0.68 level against the US dollar in local trading on Monday. The domestic data was weak with another depressed reading for the manufacturing PMI index which will maintain recession fears.
Levels of risk aversion will remain extremely important in the short term and a rally in Asian markets provided support to the Australian currency on Monday. After a renewed decline to 0.6650, the Australian dollar rallied again to above 0.6800 even though the US currency was firm against European currencies.
A smaller than expected cut in interest rates overnight by the Reserve Bank could provide additional Australian dollar support.
