Daily Currency analysis for Thursday, October 29, 2008
The Euro retreated to lows below 1.2650 on Wednesday, but then regained ground and pushed sharply higher to a peak near 1.30 before the Fed rate decision.
The US durable goods data was slightly stronger than expected with a 0.8% increase in September, but there was still a 1.5% underlying decline and there was a downward revision to last month’s data which will maintain fears over the investment outlook.
Following the FOMC meeting, the Fed announced a further 0.50% cut in interest rates with the Fed funds rate at 1.00%, equalling the lows seen during 2004. In the statement following the decision, the FOMC referred to fact that activity appeared to have slowed markedly while downside risks to growth persisted.
It also stated that it will act as needed to promote sustainable economic growth and price stability which will maintain expectations that rates could be cut even further. It is also significant that there was a unanimous vote which suggests that growth fears took centre-stage.
There will be nervousness ahead of the GDP data on Thursday with fears of a contraction in activity, although the main impact will probably be seen in the fourth quarter as the credit contraction takes full effect.
The comments from ECB officials continued to suggest that there would be a further near-term cut in interest rates. The German government also announced that it would announce bold fiscal measures to help support the economy and this should underpin confidence towards the Euro to some extent and it held above 1.29 in late US trading.
After falling sharply on Wall Street gains, the Japanese currency was also undermined by a report from the Bank of Japan that it was considering an interest rate.
There was a rebound in industrial production for September, but there was a quarterly decline and officials are very concerned over deteriorating conditions. Bank of Japan member Nishimura, for example, stated that downside economic risks were rising.
Any rate cut would tend to weaken the yen and it would also send a message that the authorities are willing to take action to curb the Japanese currency strength which would fuel intervention speculation. There is still major unease over the economic and market outlook and the dollar dipped back towards 96.50 in Asian trading on Wednesday due to residual caution.
The dollar also slipped after the FOMC decision before settling near 97.00 as Wall Street dipped in late trading.
From a peak above 1.62 in Asia on Wednesday, Sterling weakened to lows below 1.5950 before finding fresh support . The UK currency also found support close to 0.80 against the Euro and pushed sharply stronger in US trading.
UK consumer lending remained weak in September at GBP2.4bn, indicating the economic stresses, although there was a recovery from the very weak levels of GBP0.4bn previously.
MPC member Blanchflower maintained his downbeat stance towards the economy and his calls that a significant rate cut is required to prevent a deep recession.
The UK currency still retained a firm tone, correcting the massively over-sold conditions seen over the past week, and pushed to a high above the 1.64 level against the dollar with a net advance against the Euro.
The franc strengthened significantly against the dollar on Wednesday with a peak around 1.1250. The Swiss currency also strengthened sharply to 1.4550 against the Euro before a retreat to 1.4660.
The National Bank announced that it would offer additional 3-month currency swaps to the market in an attempt to secure greater control of the repo market and push Libor rates back towards the 2.50% target level.
There will also be further speculation that the bank will look to lower interest rates ahead of the December policy meeting. The pressure on the bank will be particularly acute if there is a further ECB rate cut next week.
The Australian Dollar peaked close to the 0.65 level in local trading on Wednesday before weakening back to 0.64. The Australian currency will gain further relief if there is a sustained improvement in risk appetite, especially as global interest rates are cut. There will still be a major mood of unease and caution given that growth conditions are liable to deteriorate even if there is financial-sector relief.