by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Friday, October 17, 2008
There was a further decline in Libor rates for the day which continues to suggest that there has been some further progress in improving liquidity and easing strains in inter-bank lending. This trend should continue next week which will tend to limit dollar support as demand for the currency fades.
There was, however, an increase in the iTraxx crossover measure of default risks and this also suggest that the focus will tend to switch away slightly from the financial markets and more towards the economic deterioration which will increase corporate stresses both in the US and Europe.
The US housing data continued the pattern of notably weak growth-related releases seen over the past week. Housing starts fell to an annual rate of 0.82mn in September from a revised 0.87mn the previous month which was the lowest rate since 1991 while permits also continued to weaken to 0.79mn for the month.
The string of weak releases this week will maintain pressure for the Federal Reserve to cut interest rates again and the comments from Fed Chairman Bernanke will be watched closely on Monday with markets close to pricing in a 0.50% cut at the end of October. Fears over the economy will also limit dollar support.
ECB officials continued to downgrade their growth outlook and this will maintain expectations that there will be further interest rate cuts as business confidence comes under pressure. Expectations of lower interest rates will tend to curb Euro support and it dipped to 1.34 in New York as Wall Street retreated.
The Japanese currency will tend to lose ground if there is any improvement in credit risk and some market optimism that the banking sector has been stabilised . In contrast, increased fears over the US and global economy will tend to underpin the yen with less enthusiasm for high-yield currencies as recession fears mount.
The yen remained slightly weaker on Friday as regional equity markets rallied, but there will still be major caution with a reluctance to maintain positions. The dollar dipped back towards the 101 level as caution prevailed in early US trading before a move to 101.60 in New York. Overall, confidence towards financial markets has stabilised, but confidence will inevitably be brittle.
The UK currency challenged resistance levels close to 0.7740 against the Euro on Friday, but was unable to strengthen through this level. The UK currency was also unable to hold above the 1.7350 level against the dollar, but it had a relatively firm tone.
There were no data releases with Sterling moves influenced strongly by the movements in stock market prices.
There will still be major fears over the economy and further pressure on the Bank of England to cut interest rates again. Sterling will still gain some support from optimism that the banking sector has been stabilised and there will be reduced banking-sector demand for the currency.
The dollar was unable to make a fresh challenge on levels above 1.14 against the franc and consolidated close to the 1.1350 level. The Swiss currency maintained a generally firm tone against the Euro over the day.
There were further stresses within Eastern European economies as market fears increased and this also maintained expectations that borrowing in the Swiss currency would decline. This trend could be important in supporting the Swiss currency over the next few weeks, especially if capital outflows from Eastern Europe increase.
There was a late Wall Street rally on Thursday which helped push the Australian currency back towards the 0.70 level against the US dollar. The global economic trends will also be watched closely in the short term.
There will be further fears that the downturn in conditions will trigger renewed selling on commodity prices which would also undermine the currency. In this context, the Australian dollar will struggle to gain strong benefit from any sustained recovery in equity prices, but it did prove more resilient that over the past two weeks.