by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentary for Monday, October 27, 2008
The Euro remained under pressure in European trading on Monday and dipped to lows around 1.2330 against the dollar, a fresh two-year low for the currency.
The German IFO business sentiment index weakened further to 90.2 in October from 92.9 previously, a record low for the index as expectations deteriorated sharply. Although IFO officials also cautioned against excessive pessimism, there will be further expectations of Euro-zone deterioration and pressure for further interest rate cuts.
In comments on Monday, ECB Chairman Trichet stated that the bank could cut interest rates gain at the November 6 meeting, although a reduction was not certain. While Trichet was relieved that oil prices had fallen and that inflation should fall back towards 2.0% during 2009, he also warned against complacency. Pessimism towards Europe will tend to continue in the short term, although there was a strong rebound in late trading with European bourses attempting a return to positive territory.
The US new home sales data was similar to the existing home sales data on Friday with a small monthly increase in sales to an annual rate of 464,000 in September from 452,000 previously while there was a further decline in inventories and prices. The consumer confidence data will be watched closely on Tuesday, although the impact may be limited ahead of Wednesday’s FOMC interest rate decision with markets still pricing in a 0.50% rate cut.
The Euro rebounded back to above the 1.25 level in US trading as volatility levels remained high with a slight easing of fear curbing immediate dollar demand.
In a weekend statement, G7 warned that it was concerned over the recent excessive volatility in markets and this will increase speculation over co-ordinated intervention to stabilise markets, especially with Australia supporting the local currency over the past 24 hours.
Official actions will, therefore, continue to be watched very closely in the short term, especially with further earnings warnings from Japanese companies. There will also be speculation over a Bank of Japan cut in interest rates this week as the Nikkei index weakened sharply to a 26-year low.
The weakness in equities and severe risk aversion maintained firm yen demand on Monday and the dollar weakened to lows below 92.
Any sign of division within G7 would tend to trigger further yen buying and the French Finance Minister stated that intervention would be a matter for Japan rather than G7 as a whole. The dollar was unable to sustain a recovery back above 94 as Wall Street dipped in late trading.
Sterling failed to sustain the corrective recovery against the dollar seen late on Friday. It dipped to near the six-year low around 1.5250 seen on Friday before rallying back to above 1.55 while the UK currency fluctuated around 0.80 against the Euro.
The latest Hometrack survey recorded a further decline in house prices for October with a 7.3% annual fall. Markets will remain on alert over comments from Bank of England officials as they may want to massage interest rate expectations ahead of the November MPC meeting. In particular, they may want to signal caution given that futures markets are pricing in a sharp reduction in rates.
Overall confidence in the economy will remain weak in the short term, especially with some tensions over fiscal policy and this will limit Sterling’s recovery prospects.
The franc continued to resist losses beyond 1.17 against the dollar on Monday and pushed to 1.1570 in US trading. The franc also pushed to highs near 1.43 against the Euro, the strongest franc level since the Euro’s introduction in 1999.
The National Bank will remain uneasy over the recent sharp franc appreciation within Europe, especially with export markets already under pressure due to faltering demand within Europe.
There will be expectations of further interest rate cuts by the National Bank and the franc corrected weaker against the Euro, but a sustained improvement in risk appetite is likely to be required before the franc losses substantial support.
There was renewed Australian dollar selling in local trading on Monday with a slide to lows near 0.6050 against the US currency. The Reserve Bank of Australia intervened in the markets to help support the local currency as there was a further savage unwinding of positions with the Australian currency at all-time lows against the yen.
Volatility will remain extremely high in the short term and the Australian dollar will also tend to be undermined by the sharp decline in commodity prices as global recession fears intensify. The Australian dollar initially staged a limited recovery, but was drifting weaker again in New York.