by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Daily currency analysis for Wednesday, October 22, 2008
Euro selling accelerated in Asian trading on Wednesday and it weakened to lows below 1.2750 before a weak corrective recovery. This represented a 20-month low for the Euro against the US currency with relentless dollar buying even though there was a further easing of Libor rates.
Euro-zone growth fears have persisted with strong expectations of further ECB interest rate cuts. The Euro was undermined substantially by the liquidation of positions and the breaking of longer-term support levels.
The dollar also continued to gain important defensive support from a downgrading of global growth prospects and persistent stresses in the emerging markets. As these tensions persisted, there was a further unwinding of underlying positions which benefited the dollar, especially with commodity prices also remaining under severe pressure.
The Labour department recorded that layoffs were at a six-year high and fears over the US economy will certainly persist. There is also likely to be increasing alarm over the impact of sharp dollar gains as this will pose a further important threat to the economy given that export growth has provided an important cushion over the past few quarters.
The latest jobless claims data will also be watched very closely on Thursday to assess whether there has been a fresh round of layoffs. The extent of structural dollar demand will remain a key feature in the near term with high volatility set to continue. The Euro settled close to 1.2850 in New York.
The trend of yen gains accelerated in Asia on Wednesday as rapid moves and stock-market pressures triggered stop-loss selling of high-yield currencies. The Japanese currency strengthened to a four-year high against the Euro while it also pushed through the 100 level against the dollar as a lack of liquidity intensified the moves. A decline of confidence in regional economies also triggered additional yen support.
There was some temporary relief in Europe, but the dollar failed to regain the 100 level and there was renewed yen support as the Dow Jones index was subjected to renewed selling with the dollar testing 2008 lows below 98 against the yen.
Markets will be on increased alert over Bank of Japan rhetoric in the near term given the greater risk of official action to stabilise markets. Volatility has spiked to extreme levels, especially against European currencies, which will cause concern and there will be greater unease over export prospects.
Sterling Selling accelerated in Asia on Wednesday following the downbeat comments from Bank of England Governor King and it fell sharply to lows near 1.62 before a marginal recovery. Recession fears persisted on Wednesday with the government repeating warnings while the Bank of England regional survey also expressed greater concerns over the economic situation.
The minutes from October’s MPC meeting recorded a 9-0 vote for the 0.50% interest rate cut which was co-ordinated among the global central banks. The bank referred to a deterioration in growth expectations and reduced fears over inflation. The minutes should not have a big impact on rate expectations with markets already pricing in a further substantial rate cut at the November meeting.
Sentiment will remain extremely fragile in the short term, particularly in view of the bank’s warnings over the Sterling outlook with volatility also remaining at elevated levels.
The Swiss currency retained a strong tone on Wednesday with a peak close to 1.4850 against the Euro before a limited correction. The dollar challenged the 1.17 level against the Swiss currency before encountering resistance and it settled just above the 1.16 level.
Risk aversion spiked stronger again during the day on a combination of global growth fears and renewed decline in stock-market prices while emerging-market currencies were also subjected to renewed selling pressure.
There will be increased fears over the domestic economy, but international trends will tend to dominate in the short term as risk appetite remains depressed.
Source: VantagePoint Intermarket Analysis Software
The Australian dollar dipped to lows near 0.66 against the US dollar on Wednesday, although it proved slightly more resilient than over the past few weeks. The latest consumer inflation data was slightly stronger than expected with a 1.2% increase for the third quarter, although the impact will be limited with expectations that the Reserve Bank will cut interest rates further.
The Australian currency will continue to be undermined fears over the global economy and expectations of commodity-price declines. The currency was, however, able to resist further selling pressure and edged back above the 0.67 level in New York.