by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Thursday, November 6, 2008
The Euro was unable to regain the 1.30 level against the dollar on Thursday and had a significantly weaker tone. The Euro was unsettled by renewed downward pressure on equity prices as fears over the global economy persisted while commodity prices were also weaker
At the latest ECB council meeting the central bank cut interest rates by a further 0.50% to 3.25%. In the press conference following the decision, Chairman Trichet stated that there had been discussion over whether to cut by a more aggressive 0.75%, but caution prevailed given that rates had also been cut in October.
The bank stated that inflationary pressures should continue to decline while growth risks remained to the downside. Despite a very high degree of uncertainty, the comments overall suggested that the bank would cut rates further, especially with Trichet stating that he did not exclude another cut.
Markets remain fearful over growth prospects and there was some disappointment that the bank did not sanction a deeper cut in rates. There will, however, be some hopes that the underlying Euro-zone fundamentals are more robust which may provide some currency support.
The latest US jobless claims were again relatively steady in the latest week at 481,000 while continuing claims were at a 25-year high which suggests an important lack of hiring. Markets will, therefore, remain nervous over the monthly employment data due on Friday with fears over a further sharp payroll fall.
As Wall Street continued to weaken, the Euro dipped to lows below 1.27 against the dollar in late US trading.
The Nikkei index fell by around 7% on Thursday as regional recession fears intensified. Minutes from the unscheduled October Bank of Japan monetary meeting indicated increased alarm over the economy and there will be renewed speculation over action to stabilise the yen if it is subjected to heavy buying pressure.
The dollar found support near the 97.50 level and edged back to around 98, but struggled to make any headway as weaker equity markets supported the yen.
Markets will be sensitive to any currency and trade policy comments from US President-elect Obama with some US currency support if there are any hints over a strong dollar policy.
The UK edged slightly stronger ahead of the interest rate decision on Thursday.
The UK economic fears persisted with the Halifax Bank reported a 2.2% decline in house prices for October to give an annual decline close to 14%.
The Bank of England sanctioned a much larger than expected interest rate cut with a cut in the base rate by 1.50% to 3.00%. This was the largest decline for over 25 years and also pushed rates to 50-year lows. The bank stated that economic conditions had deteriorated while there was a substantial risk of inflation undershooting the 2.0% target.
There will be some relief that the bank has responded aggressively to deteriorating economic conditions. Yield support has weakened sharply, however, and UK rates are now lower than in the Euro-zone which will sap support.
There is also likely to be some unease that the very sharp rate cut indicates that conditions within the economy have deteriorated very rapidly.
The franc found some support weaker than the 1.50 level against the Euro, but it was back on the defensive against the dollar with lows near 1.1800.
The National Bank announced a surprise interest rate cut of 0.50% which took the central rate down to 2.00% from 2.50% previously. The bank had already voiced increased concerns over the economy, especially with a downturn in export conditions, and there were warnings over a GDP contraction for the next few quarters in comments on Thursday.
The franc still derived some defensive support as risk appetite faded in line with weakening asset prices.
The Australian dollar weakened to lows below 0.67 against the US dollar in Asian trading on Thursday before rallying. The labour-market data was stronger than expected with employment gains of over 34,000 for October while unemployment held steady and this will provide some degree of relief, although underlying economic fears will certainly continue.
The Australian dollar moves will also be linked strongly with degrees of risk appetite and the currency will lose ground if there is renewed downward pressure on equity prices. In this context, Wall Street weakness pushed the Australian dollar to lows below 0.67 in New York with high volatility set to continue.