by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Wednesday, November 5, 2008
The clear victory for Obama offered some initial dollar support on Wednesday with gains to 1.28 against the Euro. Fiscal policies will be an important focus and plans for a further stimulus would offer some hopes for an economic recovery, but the deficit implications will be a threat.
Markets will also look for any suggestions on key Treasury officials as the dollar and trade policies will be important political issues.
The US data maintained a very tone as the ADP report recorded a private-sector employment decline of 157,000 for October after a revised 26,000 decline previously. Over the past few months, the ADP report has consistently been stronger than the official payroll report and the data will increase fears over Friday’s data.
The ISM index for the services sector also weakened to 44.4 in October from 50.2 which was the lowest reading on record. There were further depressed readings for the orders and employment components which will maintain serious economic fears.
European fears persisted with the PMI services index weaker than expected, although the Euro found buying support close to 1.28 and pushed to highs above 1.31 in US trading. Dollar Libor rates continued to decline sharply which should continue to lessen demand for the US currency. A sharp drop on Wall Street triggered fresh unease and the Euro retreated back to below 1.30.
The ECB will be an important focus on Thursday with strong expectations that the bank will cut interest rates again, potentially by 0.50%. Markets will also watch comments from Trichet very closely for hints over future policy and volatility will remain an important feature. The Euro may be rewarded if there is evidence of a pro-active ECB stance to support the economy.
Bank of Japan Governor Shirakawa warned against cutting interest rates too far in comments on Tuesday while former top finance official Sakakibara warned that the yen could strengthen sharply on an unwinding of carry trades.
On Wednesday, the Nikkei index pushed to a three-week high and there is scope for a further easing of fear in the short term which would tend to weaken the Japanese currency even though high volatility will persist.
The dollar struggled to overcome resistance levels on Wednesday and dipped to below 98.50 as the yen regained some ground, although the Japanese currency only found limited buying support on the crosses.
The UK PMI index for the services sector weakened to an all-time low of 42.4 in October from 46.0 previously. Output also continued to fall with a 0.8% monthly decline in manufacturing output and Sterling retreated again following the data with a test of support below 1.58 against the dollar.
Thursday’s 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% and there will be further speculation of a reduction of as much as 1.0% to 3.5%. A sharp cut would diminish UK yield support, but could be received favourably on hopes that the economy would stabilise and any initial losses could be reversed.
The currency rebounded with a peak above 1.6150 against the dollar, but was unable to sustain the advance and volatility will again be a key feature again on Thursday.
The dollar hit resistance close to 1.1750 against the franc on Wednesday and retreated to lows around 1.1550. The dollar was cushioned by underlying franc weakness on the crosses with the Euro strengthening to a peak around 1.5150.
The franc was again unsettled by the easing of fear in the global markets and an easing of credit stresses while Swiss Libor rates fell back to near the 2.50% target.
There will also be further expectations that the National Bank will move to cut interest rates at or before the December interest rate meeting, especially if the ECB sanctions a sizeable rate cut on Thursday.
The Australian dollar was unable to hold Tuesday’s gains and dipped back towards 0.6850 against the US currency on Wednesday. The domestic data was mixed with a stronger than expected trade surplus as exports rose strongly. In contrast, there was a sharp decline in building approvals which will maintain fears over the economic trends.
The degrees of risk appetite will remain very important and there is still scope for a net improvement in conditions. The Australian dollar again failed to break the 0.70 level on Wednesday with a corrective decline in commodity prices and a weaker Wall Street toughening resistance levels.