by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Thursday, October 16, 2008
The Euro found support near 1.3350 on Thursday, but was unable to sustain a move above 1.35. The Euro was hampered by a further decline in key commodity prices while there was further defensive dollar support when stock-markets fell sharply.
The US growth-related data remained generally weak with a particularly alarming Philadelphia Fed report. The confidence index dropped very sharply to -37.5 in October from a reading of +3.8 the previous month and this was the lowest reading since 1990. In addition, industrial production fell 3.8% in September, although this was distorted by the impact of hurricanes and the Boeing strike.
There was some relief in the latest jobless claims data with a dip to 461,000 in the latest week from 477,000 previously, but there will be fears that there will be a delay until there is a fresh surge in claims.
As far as inflation is concerned, headline prices were unchanged for the month while the core increase was held to 0.1%, both slightly below expectations. The data combination will reinforce speculation that the Federal Reserve will sanction a further cut in interest rates, especially as commodity prices have remained under heavy selling pressure.
The latest TIC capital flows report recorded small net long-term inflows of US$14.3bn for August with overall flows slightly negative. Overall, the dollar is likely to be more dependent on short-term inflows. While defensive US currency demand continues, inflows should remain strong, but there will still be important risks to the dollar if market tension subside. Libor rates continued to edge lower and this should eventually lessen dollar support with a late Wall Street rally allowing renewed Euro gains to 1.3460.
The Japanese currency strengthened through the 100 level against the dollar on Thursday as equity markets came under pressure. The Nikkei index fell by close to 10% over the day as risk aversion spiked higher again.
The Japanese currency should continue to gain some important protection from increased fears over the global economy. The dollar still managed to find support below the 100 level with some domestic funds looking to sell the currency in very nervous conditions.
Subsequent moves remained dominated by US equity market trends with the yen fluctuating sharply before settling weaker than 101 as the Wall Street rose sharply in late trading. There will be speculation over covert Bank of Japan dollar support operations below the 100 level.
The UK currency found some support on dips to below 1.7150 against the dollar on Thursday. Although it struggled to make any significant headway for much of the day, there was a late rally back above 1.73 as stock markets rallied.
The Bank of England announced new money-market mechanisms to improve liquidity including a new discount window and this should help ease funding costs in the near term. It will also sustain the mood of some optimism that the UK banking sector will stabilise more quickly than in the US and Euro-zone with Sterling pushing to 0.7760 against the Euro.
There will still be fears over a further sharp deterioration in the economy over the next few weeks which will dampen confidence.
The Euro dipped to lows beyond 1.5300 against the franc before rallying. There were further stresses within Eastern European currencies which provided some net franc support.
The Swiss authorities provided support for the principal Swiss banks as confidence surrounding the sector deteriorated. The government will take a stake in UBS and the bank’s non-performing loans of up to CHF60bn would be transferred out of the bank into a new fund.
The National Bank stated that it would watch economic trends before determining whether there was scope for a further cut in interest rates. The latest retail sales report was subdued with sales unchanged over the year and the franc failed to hold gains beyond 1.13 against the dollar.
The Australian dollar dipped to lows just below the 0.65 level against the US dollar on Thursday before a partial rebound with confidence undermined by a renewed slide in stock markets. Confidence in the domestic economy will remain weak with expectations of further interest rate cuts.
The global trends will tend to remain dominant for now and fears over the outlook will remain a negative factor for the Australian currency, especially as there is the risk of further downward pressure on commodity prices. As Wall Street attempted to rally, the Australian dollar rallied back to 0.6850 with high volatility persisting.