by Darrell Jobman, Editor-in-Chief,TraderPlanet.com
Commentary for Tuesday, October 21, 2008
The Euro failed to regain any support on Tuesday and dipped to test longer-term support levels around 1.3260 in Europe. Once this level broke, there was further downward pressure on the currency and it slumped to below 1.31 in New York, the lowest level for 19 months. There were further concerns over the Euro-zone growth outlook while markets continued to price in lower interest rates.
There was further technical dollar demand even though there was a further decline in Libor rates over the day. There were further reports of international fund pressures and an underlying demand for the US currency, especially with important stresses in Latin American markets.
The dollar was able to secure further defensive support as global growth fears intensified even as US fears increased. Commodity prices also continued to fall on demand fears which reinforced the near-term currency trends. There was also some optimism that the pro-active US stance and possible second fiscal stimulus would allow a quicker recovery in the economy during the course of 2009.
There are still very important fundamentals risks associated with the US economy, especially with growth indicators still deteriorating rapidly. Official comments on the dollar will also need to be watched closely as the administration could become uneasy over the extent of recent gains given the need to protect export markets.
Domestically, Japanese officials remained very cautious over the economic outlook with increased fears over the global environment. Bank of Japan officials also continued to suggest that there may be further support for the banking sector, including the major institutions.
Regional stock markets were again generally firm, but the yen was able to resist selling pressure with the dollar still unable to make headway above the 102 technical resistance region. It consolidated around 101.50 in early Europe before edging slightly lower.
As equity markets came under renewed pressure, there was heavy Euro selling against the yen with the Euro weakening to near 131 while the Japanese currency advanced to highs beyond 100.50 against the dollar in US trading.
The UK currency was unable to make any significant headway against the Euro in European trading on Tuesday and it weakened sharply against the dollar with a decline to below the 1.70 level.
The latest CBI industrial survey recorded a sharp deterioration with the orders index weakening to -39 in October from -26 the previous month and this was the lowest figure for five years. The quarterly survey also registered the lowest level for over 30 years as confidence eroded rapidly. The data will maintain pressure for a series of interest rate cuts from the Bank of England.
Comments from Bank of England Governor King were notably downbeat as he stated that the economy is likely entering a recession while the Sterling decline may be faster and larger than expected previously. These comments will reinforce negative sentiment surrounding the economy and currency. Following King’s remarks, Sterling dipped to lows below 1.67 against the dollar which was the lowest level for close to five years.
The Swiss franc was able to resist heavy selling pressure on Tuesday with the dollar hitting tough resistance close to 1.16 and the franc was able to gain renewed support in New York trade. The Swiss currency was robust against the Euro with gains to near 1.5050.
The franc gained some renewed defensive support as stock markets retreated and there were further notable stresses within emerging-market currencies.
The Swiss trade surplus was unchanged at CHF1.44bn for September, but there was a sharp decline in exports and imports over the month which will reinforce expectations of a sharp slowdown. National Bank member Hildebrand also stated that the bank had scope for flexibility on interest rates, but international trends will tend to remain dominant for now.
The Australian dollar was unable to hold above the 0.70 level against the US currency on Tuesday. Reserve Bank governor Stevens was optimistic that the economy could secure a soft landing and this will provide some degree of support to the currency as it suggests that the bank will be slightly more cautious over aggressive monetary easing.
Nevertheless, interest rates are still likely to fall significantly further which will limit currency support.There were renewed fears over the global economy on Tuesday and commodity prices also continued to decline which put renewed downward pressure on the Australian dollar. Wider US currency strength intensified the pressures and helped push the local currency to lows below the 0.68 level.