by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Friday, October 10, 2008
The Euro pushed above the 1.36 level against the dollar in European tradingon Friday, but again failed to hold the gains and dipped sharply lower in New York.
European stock markets continued to fall sharply and there was sustained downward pressure on Wall Street in early trading. Crucially, there was still serious distress in the credit markets as inter-bank dollar rates remained extremely high at levels beyond over-night. In this environment, there was still a structural dollar shortage and strong demand which underpinned the currency.
The G7 meeting will be watched closely in the short term and global international officials will continue their discussions over the weekend. If they are unable to trigger any improvement in market confidence, then there will be the threat of renewed upward pressure on the dollar next week. In contrast, any decisive and well-received measures and an easing of credit stresses would be likely to boost the Euro. There is also likely to be speculation over further co-ordinated moves to lower interest rates next week.
The US trade deficit narrowed to US$59.1bn in August from a revised US$61.3bn the previous month. There was a drop in both imports and exports over the month and the decline in industrial trade will reinforce fears over the US and global economic trends.
The credit and stock markets still dominated and the Euro dipped to fresh 14-month lows below the 1.33 level in US trading as US stocks weakened sharply before rallying late in the US session.
Market conditions deteriorated further in Asian trading on Friday with a further slide in equity prices as the Nikkei weakened by close to 10% in panic conditions. The yen strengthened to highs beyond 98 against the dollar before weakening back to 99.20 in early Europe.
The degrees of risk aversion will remain of critical importance in the short term and underlying yen demand is likely to be firm. Markets will be on alert for any verbal intervention by the Bank of Japan to curb yen gains and there will also be the possibility of co-ordinated intervention if markets fail to stabilise and the yen is subjected to disorderly upward pressure next week.
The yen fluctuated against the dollar, in line with stock market moves before settling near 100 late in US trading.
Fear still dominated in Asian trading on Friday with a further loss of confidence in the banking sector and the UK currency weakened to lows below 1.68 against the dollar. This was the lowest level for over five years and the UK currency also dipped to beyond 0.80 against the Euro before staging a slight recovery.
Sterling secured a recovery later as trading volatility remained intense. The trading pattern was similar to that in recent days and Sterling weakened again once European trading wound down. The UK currency rallied again late in US trading as Wall Street attempted to rebound.
The inflation data would have been important next week, but the significance has been reduced sharply by the intense stresses in the credit and equity markets as the bank has downgraded the importance of short-term inflation data. There will be further pressure on the Bank of England to cut interest rates again quickly to help restore market stability.
The Swiss currency gained sharply in Europe on Friday with gains to highs beyond 1.51 against the Euro. There was increased fear over the Eastern European economies and this also triggered fears that there would be a repayment of franc-denominated loanswhich would tend to put upward pressure on the franc.
The franc strengthened to 1.1120 against the dollar, but weakened again in US trading as the US currency retained a robust tone.
Near-term franc trends will remain dominated by the degrees of risk aversion with fear remaining dominant as credit-market spreads failed to narrow.
As Asian equity markets weakened sharply on Friday, the Australian currency weakened back to lows near the 0.65 level. Risk appetite will remain very low in the short term which will tend to undermine the Australian currency and the increase in fears over global growth trends will also tend to damage the local currency as industrial commodity prices decline.
The key short-term feature is likely to be a sustained increase in volatility. As Wall Street came under renewed pressure, there was renewed selling pressure on the Australian dollar with a dip to levels below 0.65 against the US currency.