by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Friday, October 24, 2008
The Euro was subjected to heavy selling pressure in Asian and early European trading on Friday with lows around 1.25 against the dollar, the weakest level for two years.
Equity markets came under renewed heavy selling pressure as global growth fears intensified and this triggered further near-term demand for the US currency.
The PMI data was weak with the Euro-zone manufacturing index weakening to 41.3 from 45.0 previously while services were more resilient with a reading of 46.9 from 48.4 previously. In particular, the German services sector held firm, but the data continued to indicate a serious slowdown in the economy and markets remained confident that the ECB would move to cut interest rates again quickly.
The US data recorded an increase in existing home sales to an annual rate of 5.18mn in September from 4.91mn previously. There was a decline in inventories while prices fell 9% over the year. The data will spark some hopes of a stabilisation in sales, but markets will continue to expect a Federal Reserve rate cut next week.
The underlying structural considerations will remain important in the short term. There is still strong dollar demand, but supply is likely to increase as central banks take advantage of current levels to diversify reserves. There is also a growing risk of central bank intervention to stabilise the markets and the dollar is extremely overbought. The US currency consolidated close to the 1.26 level with the Euro still on the defensive.
Japanese equity prices came under heavy selling pressure on Friday with rapid declines and this contributed to renewed upward pressure on the yen, especially once the dollar weakened through the 2008 lows. The US currency fell to near 95 against the yen as stop-loss selling accelerated.
Panic increased in Europe with the yen strengthening rapidly to 13-year highs beyond the 92 level against the dollar and 6-year highs beyond 115 against the Euro.
The comments from Japanese officials will be watched very closely in the short term with further speculation over action to intervene and stabilise the currency markets, especially with earnings warnings from Japanese companies. There will also be speculation over a cut in interest rates next week.
There was some stabilisation in markets later in the day as equity markets attempted to rally, but underlying yen demand remained firm as fear dominated.
Sterling came under very heavy selling pressure on Friday with the break of 1.60 against the dollar triggering substantial stop-loss selling. The UK currency was also undermined by a further spike higher in risk aversion.
There was panic selling in early Europe which pushed the UK currency down to lows below the 1.53 level against the dollar, the weakest for over five years.
The UK data was weaker than expected with GDP recording a provisional 0.5% decline in the third quarter. This was the first quarterly contraction for over 15 years and reinforced expectations that the economy was heading for a serious recession, especially as markets had been expecting a more moderate 0.2% contraction.
The Bank of England has clearly indicated that interest rates will be cut again in November and there was increased market speculation that there could be a reduction of 1.0% in base rates. The bank may want to be more cautious, especially as Sterling weakness is already providing a significant monetary relaxation. Sterling corrected back to above 1.58 later in New York.
The franc found support above the 1.17 level against the dollar and regained ground even though the US currency was robust. The Swiss currency advanced very strongly against the Euro with a peak beyond the 1.45 level.
The market trends were dominated by levels of risk aversion and the Swiss currency gained strong support as market fears intensified with a flight to safety. The franc retreated from its best levels as the sense of panic subsided.
The National Bank will certainly be uneasy over the rapid franc gains within Europe, especially with exports already under pressure.
Source: VantagePoint Intermarket Analysis Software
The Australian dollar was subjected to renewed downward pressure in local trading on Friday. Fear remained the dominant influence as equity markets came under fresh selling pressure with a dip to below the 0.63 level.
Confidence in the global economy has also weakened further with the Australian currency hit by a decline in commodity prices. Volatility levels will remain very high in the short term and the Australian dollar will also be at risk if there is a further surge in risk aversion. The currency weakened to lows near 0.6050 before a limited recovery to 0.62 as fear dominated.