by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Tuesday, October 7, 2008
The Euro found support below the 1.35 level on Tuesday and was generally stronger over the day with a peak above 1.37, but it was unable to sustain the advance and drifted back towards 1.36 in New York as trading conditions remained very choppy.
The Federal Reserve announced that it would set up a facility to buy commercial paper in a further attempt to improve the functioning of markets and this should trigger some optimism that credit conditions will ease.
Fed Chairman Bernanke took a generally downbeat view on the economy in comments on Tuesday with comments that the credit stresses could take a heavy toll on the economy while inflation risks had eased. Bernanke also commented that the Fed would need to consider whether further interest rate cuts would be appropriate.
The minutes from the previous FOMC meeting described the outlook as highly uncertain, but some members were leaning towards pushing for an interest rate cut. Given that conditions have deteriorated sharply since the FOMC meeting, there will be further expectations of a move to cut rates. There will be an increasing risk of an inter-meeting move if conditions fail to stabilise and the decline in consumer credit for the first time in 10 years for August will reinforce fears over consumer spending trends.
The German industrial orders data for August recorded the first increase for nine months, but the impact was limited with markets forward looking. Comments from ECB officials suggested that the bank was moving towards an interest rate cut, but that it would prefer to wait until the next meeting. Confidence in both currencies is likely to be frail in the short term.
The Bank of Japan left interest rates at 0.50% following the latest policy meeting and maintained its economic assessment. The bank will consider intervention to curb rapid currency gains if instability continues and this will tend to curb aggressive yen buying with high volatility set to continue.
The yen lost some ground in Asia on Tuesday as a larger than expected 1.0% cut in Australian interest rate increased hopes that there would be more aggressive global central bank action to ease credit pressures. The yen weakened back towards 103 against the dollar and 140 against the Euro. The Fed move to authorise the purchase of commercial paper also weakened the yen.
The Japanese currency then regained ground to 101.20 in US trading as Wall Street suffered renewed heavy losses.
Sterling weakened sharply in Europe on Tuesday as there were renewed fears over the UK banking sector with particular fears surrounding the Royal Bank of Scotland.
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 act this week with markets increasingly speculating over a 0.50% rate cut on Thursday. The Australian move could spark speculation over an even more aggressive move, especially with a very weak BCC business confidence survey.
The industrial data remained weak with a 0.6% decline for August which was the sixth successive monthly decline.
The government confirmed that it would announce a package of support for the banking sector including capital injections. Measures to boost capital would underpin confidence to some extent, although sentiment will remain very fragile. Sterling was unable to hold gains and settled near 1.75 against the dollar.
The Swiss franc generally fluctuated near the 1.14 level against the US currency during Tuesday. The franc weakened to 1.5610 against the Euro before strengthening back to 1.5500.
Risk tolerances improved temporarily which initially weakened the franc, but the underlying tone was still extremely cautious and a renewed slide in equity markets allowed the franc to regain ground.
There will be some speculation over a switch of funds out of Switzerland as deposit protection is not to be strengthened at this time and this may unsettle the franc to some extent.
Source: VantagePoint Intermarket Analysis Software
The Reserve Bank of Australia cut interest rates sharply by 1.0% to 6.0% at the latest meeting compared with expectations of a 0.50% reduction. The aggressive cut will reinforce fears over the serious domestic situation, but with some relief that the authorities are taking decisive action. The key short-term aspect is liable to be a sustained increase in volatility and the Australian dollar pushed back towards 0.73 against the dollar in early Europe on Tuesday.
The currency found it difficult to sustain the gains as Wall Street was subjected to renewed selling pressure and it dipped back towards 0.7050 as global growth fears intensified.