by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Monday, October 13, 2008
Over the weekend, G7 officials announced a five-point plan to help restore stability to financial markets including action to protect bank deposits. European leaders moved forward to provide greater details including the guarantee of some inter-bank lending with key support packages from the German and French governments.
The US will also move towards injecting capital into the banks directly. The Euro pushed back towards 1.36 on initial relief in Asian trading, but struggled to sustain gains as confidence remained fragile.
The credit spreads will be watched very closely in the short term as they are likely to have a crucial market impact. If G7 are unable to trigger any improvement in market confidence and narrower spreads, then there will be the threat of renewed upward pressure on the dollar. In contrast, an easing of credit stresses would be likely to boost the Euro. There was a small decline in credit spreads on Monday and there looks to be scope for a further decline over the next few days. The underlying dollar shortage should also ease which would lessen upward pressure on the currency, although volatility will continue.
There is also likely to be speculation over further co-ordinated moves to lower interest rates, although the banks would probably prefer to wait and assess whether the rescue attempts are having an impact. As Wall Street rallied strongly, the Euro pushed back to near 1.36 from around 1.35, but was still hitting tough resistance.
The Japanese currency lost ground in early Asian trading on Monday following G7 attempts to ease the credit crisis, weakening to beyond 101 against the dollar as regional equity prices rallied. Markets were still extremely cautious and the yen found renewed support as fear persisted. Reaction was limited to some extent by the Japanese market holiday.
The Japanese currency will tend to lose support if there is a sustained rally in stock markets and a tentative improvement in risk aversion. The yen dipped to lows beyond 102 against the dollar as US equity indices rallied strongly with the Dow Jones index rising by over 900 points by the close.
Over the weekend, the UK government accelerated its plans to inject capital into four main UK banks with potential stakes of GBP37bn. The government will underwrite capital-raising attempts and will take large stakes if the private funding is not forthcoming. There was a Sterling relief rally on hopes that faster action would stabilise credit conditions, but wider economic fears will remain very high.
There was a 1.2% decline in input producer prices for September while output prices dipped 0.3%, but there was still significant annual increase. The consumer inflation data will be watched closely on Tuesday and a further surge in the annual rate would provide some Sterling support.
The growth fears are liable to remain dominant which will limit the inflation data impact. MPC member Sentence also warned that the economy faced a further slowdown and the risks of a severe downturn had increased.
There will be further pressure on the Bank of England to cut interest rates again quickly to help restore market stability with strong expectations of a further cut at the November meting, if not earlier.The improvement in sentiment was crucial and the UK settled above 1.73 against the dollar with consolidation around 0.7820 against the Euro.
Near-term franc trends will remain dominated by the degrees of risk aversion. If fear remains dominant and credit-market spreads fail to narrow, the franc will secure renewed support. In contrast, a sustained rally in markets would tend to lessen demand for the Swiss currency, but confidence will remain very fragile.
The domestic banking sector will be watched closely as there will be fears that aggressive action elsewhere in Europe will put the Swiss banks at a competitive disadvantage and could lead to capital outflows.
The franc weakened to 1.5460 against the Euro and there were small net losses against the dollar.
Over the weekend, the Australian government moved to guarantee bank deposits which improved sentiment towards the domestic sector. The wider G7 efforts to stabilise the banking sector and alleviate credit market stresses also underpinned risk appetite and the Australian dollar recovered to highs around 0.68 against the dollar in Asia.
There will still be major fears over the global economy which will limit buying support for the Australian currency with high volatility set to continue. There was initial consolidation close to the 0.68 level in New York before fresh gains to near 0.70 as US equity prices gained strongly.