by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Tuesday, October 14, 2008
The mood of improved risk appetite was sustained in Asian trading on Tuesday following US confirmation that the administration would buy stakes in the top US banks worth US$250bn as part of the TARP programme. The Euro pushed to highs around 1.3770, but it was unable to sustain the gains as Wall Street came under some selling pressure.
There was a small decline in Libor rates on Tuesday, but three-month rate was still at highly elevated levels near 4.50%. More positively, there was a decline in the two-year yield spread over Treasuries to the lowest level for three weeks which suggests some improvement in confidence. There should be a further improvement in credit spreads and lower Libor rates over the next few days which should lessen dollar demand.
The US economic data recorded a fresh decline in consumer confidence for September, but the Wednesday releases will be more important with the New York manufacturing index and retail sales data. Markets will expect both the Euro-zone and US economies to weaken and the US data will be important in assessing the extent and pace of the deterioration. The comments from Fed Chairman Bernanke will also be monitored very closely on Wednesday for any hints over interest rates.
The German ZEW business confidence index weakened sharply to -63.0 in September from -41.1 the previous month as financial-market fears intensified, but the impact was limited as markets were expecting a depressed figure. The Euro dipped to lows near 1.36 in US trading with sentiment still undermined by expectations of further interest rate cuts.
The Japanese government announced that it would provide an aid package for the regional banks. The move will tend to increase risk appetite which will tend to weaken the yen and there will also be some renewed doubts over the Japanese financial sector. The Nikkei index rallied very strongly with gains of close to 14% for Tuesday and there should be scope for a further improvement in risk appetite, especially if volatility eases.
The yen weakened to lows around 103 against the dollar with dollar technical resistance levels liable to become tougher above this region.
The Bank of Japan announced that it would hold an unscheduled policy meeting and interest rates were left on hold at 0.50%. The bank announced that share sales would be suspended while the bank would also supply unlimited dollar liquidity. The yen corrected back to 102 in a correction from sharp losses over the past 36 hours.
The latest UK RICS housing survey recorded a further decline in prices and very weak activity, although there was some increase in buyer interest. The BRC retail sales report recorded a 1.5% like-for-like annual decline in sales for September which will maintain fears over consumer spending.
Headline consumer inflation rose to 5.2% from 4.7% previously as energy costs continued to rise while the core rate rose to 2.2% from 2.0%. Growth fears are liable to remain dominant which will limit the inflation data impact, especially with market expectations that the rate has peaked.
Sterling should still be able to gain some support from an improvement in risk appetite, especially as the bank-rescue plans should lessen UK funding demand for the dollar. Nevertheless, Sterling was subjected to significant profit taking and dipped to lows near 1.74 against the dollar from highs above 1.76.
The Swiss franc found support weaker than the 1.5550 level against the Euro and pushed back to 1.5470 as equity markets retreated from their best levels. The franc fluctuated around the 1.13 level against the dollar with a weaker tone in US trading.
Risk appetite was stronger for much of the day which curbed defensive demand for the Swiss currency, but there was still an important mood of caution.
The government continued to warn over a sharp slowdown in the economy, but also reiterated that there was no need for a banking-sector rescue package.
Domestically, the government has announced a AUD10.4bn stimulus package to underpin the economy. This will tend to provide some support to confidence, but there will still be expectations that the Reserve Bank will cut interest rates sharply which will erode yield support.
The near-term currency moves will tend to be dominated by trends in risk aversion and the Australian dollar will gain support if risk appetite continues to improve. In this context, the Australian currency pushed to highs above the 0.72 level against the US dollar before weakening back to 0.70 as Wall Street retreated.