by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Daily Commentaryfor Monday, October 6, 2008
The Euro dipped sharply in Asian trading in Monday following the need for a fresh rescue deal for German bank Hypo Real Estate while there was uncertainty over the situation over German banks. The government appeared to move to guarantee all retail deposits at weekend meetings, but struggled to clarify the situation. There were also increased fears that Europe would not be able to agree a unified position to ease the financial crisis.
The Euro remained under pressure in Europe, notably against the yen as fear remained the dominant influence, and it dipped to below 1.36 against the dollar. The Euro-zone business confidence Sentix increase weakened further to -27.8 in September from -20.2 previously.
There were no US data releases with markets transfixed by the financial-market stresses. Wall Street came under heavy pressure due to fears that the rescue plan would be delayed and less effective than hoped. There was further selling in emerging markets and money marketconditions remained extremely tight. These two factors combined maintained strong structural dollar demand with the Euro dipping to below 1.35 in New York.
There was further intense speculation over a cut in interest rates by the Federal Reserve, potentially in tandem with the ECB to help restore stability. Some calls for an emergency G8 summit also helped push the Euro of its lows, but high volatility is set to continue.
Global sentiment then deteriorated severely in Asian trading on Monday with sharp declines in regional stock marketsand this strengthened the yen rapidly as there was a major exodus from carry trades. There was an unwinding of positions and de-leveraging as confidence in the financial sector deteriorated again.
The yen strengthened to highs beyond 140 against the Euro with the Japanese currency also pushing through the important 103.60 technical resistance level against the dollar.
There was frenetic and disorderly trading in New York as risk aversion increased sharply. The yen strengthened rapidly to highs near 100.20 against the dollar with the Japanese currency also advancing rapidly on the crosses before a partial correction.
There is a much increased risk of intervention by the Bank of Japan to curb rapid currency gains which will curb aggressive yen buying with high volatility set to continue.
European fears allowed Sterling to hold its position against the Euro on Monday, but it re-tested support below 1.76 against the US currency as confidence in the banking sector crumbled. As market turmoil increased, the UK currency dipped sharply against the dollar with lows below 1.74, the weakest level since April 2006.
The market turmoil will increase fears that the already very weak UK economy will deteriorate further. There will be very strong pressure on the Bank of England to sanction an interest rate cut this week with markets increasingly speculating over a move to cut rates by 0.50% on Thursday.
The government response will also be watched very closely and measures to underpin the banking sector would provide some degree of Sterling support. The currency prospects will, however, tend to be tied directly to the global financial-sector developments.
The franc was on the defensive against the dollar during Monday and weakened to lows around 1.1480. The franc surged to highs beyond 1.54 against the Euro, but was unable to hold the gains and weakened back to 1.5500.
The Swiss banking sector will be watched very closely in the short term. There will be some speculation over a switch of funds out of Switzerland if deposit protection schemes are not strengthened and this is liable to unsettle the franc to some extent.
The franc will still gain some important safe-haven support in the near term from a further serious deterioration in stock-market conditions.
The Australian dollar was weakened very sharply in local trading on Monday with a dip to lows below the 0.75 level against the US currency. Risk aversion increased strongly as banking fears continued and regional stock markets fell sharply.
Domestically, there will be strong expectations that the Reserve Bank will cut interest rates on Tuesday, potentially with a 0.50% cut to 6.50%. Rates reductions should not have a major impact in weakening the currency as risk considerations are liable to dominate.
There was a severe unwinding of carry trades which undermined the Australian currency. Volatility increased even further during New York trading with the Australian dollar dipping to lows below 0.70 before a corrective recovery which represented a decline of over 8% since the end of last week.