by Darrell Jobman, Editor-in-Chief,

Commentary for Tuesday, November 4, 2008


The Euro dipped to lows around 1.2525 in Asian trading on Tuesday, but then found good buying support against the dollar and on the major crosses. The Euro pushed to highs above 1.30 in US trading, more than reversing the losses seen on Monday. The dollar was undermined by a rebound in emerging-market currencies and a sharp rally in commodity prices.

There was a further decline in Libor rates during the day with the 17th successive decline as 1-month rates fell to a 14-month low. The OIS spread which is a key indicator of credit-market stresses also declined to 210 basis points, although this compares with around 90 points immediately ahead of the Lehman collapse. The decline in rates and an easing of tensions should lessen underlying dollar support.

The US election will be watched closely with uncertainty over the currency implications. A clear victory for Obama could offer some dollar support, but this may fade quickly if there are substantial Democrat gains in Congress as fiscal fears would increase.

There was little in the way of economic data during the day with the larger than expected 2.5% decline in factory orders maintaining fears over a deepening recession, especially as the latest data also recorded a sharp decline in auto sales.

The ISM index for the services sector will be watched very closely on Wednesday for further evidence on the economy while the ADP employment data will also be significant ahead of the Friday monthly employment report.

ECB member Weber downplayed the risk of severe difficulties within the Euro-zone, but still hinted that rates could decline while French Finance Minister Lagarde stated that there could well be interest rate relief this week and markets are certainly expecting a 0.50% ECB rate cut.

Source: VantagePoint Intermarket Analysis Software


The Nikkei index rose strongly on Tuesday which had some positive impact on sentiment and the dollar stabilised close to the 99 level against the Japanese currency with the Euro initially still on the defensive.

During European trading, the yen retreated sharply against the Euro and also dipped beyond the 100 level against the dollar as stock markets rallied and risk appetite improved.

The prospect of aggressive interest rate cuts in OECD countries will tend to limit support for high-yield currencies with investors seeing the yield advantage eroded rapidly. A sustained easing of fear will still tend to undermine yen support.


The UK currency dipped to a low close to 1.56 against the dollar in early Europe on Tuesday, but then secured a significant advance over the remainder of the day as the US currency stumbled. Sterling struggled to sustain a move above 1.60 and dipped to lows beyond 0.81 against the Euro.

The construction PMI data remained very weak with a further slide to 35.1 in October from 38.8 previously which continues to indicate sharp deterioration within the sector.

The Bank of England interest rate decision will be a key focus with markets confident that there will be a cut if at least 0.50%. The larger than expected Australian interest rate cut will also reinforce expectations of an aggressive UK move, possibly by as much as 1.0% to 3.5%, which would diminish UK yield support.

A sharp cut could, however, be received favourably on hopes that a deep recession could be avoided and high volatility will persist.

Swiss Franc

The dollar pushed to a high of 1.18 against the franc on Tuesday before weakening back to around 1.16. The Swiss currency dipped sharply against the Euro with a low beyond 1.51.

Immediate demand for the Swiss currency was undermined by an improvement in risk appetite, especially as confidence in emerging markets recovered.

Consumer prices rose slightly more than expected for October with a 0.50% increase for the month which slowed the decline in the annual rate, although it did decline to 2.6% from 2.9%. Markets will continue to price in an official interest rate cut at or before the December policy meeting.

Source: VantagePoint Intermarket Analysis Software

Australian dollar

The Reserve Bank of Australia cut interest rates by 0.75% to 5.25% at the latest policy meeting compared with market expectations of a 0.50% cut. The reduction will erode yield support and initially pushed the Australian currency down to lows around the 0.66 level before some stabilisation.

The Australian dollar will tend to be unsettled by fears over the domestic and global growth outlook, but the improvement in financial-risk conditions will provide some degree of support. There was also support from a strong rebound in commodity prices and the Australian currency pushed to a high above 0.70 as stock markets rallied.