by Darrell Jobman, Editor-in-Chief, TraderPlanet.com
Commentaryfor Wednesday, October 8, 2008
The Euro found support below the 1.36 level in early Europe on Wednesday as market tensions remained intense with the Euro proving slightly more resilient than in previous days.
In European trading, most of the principal global central banks announced a co-ordinated interest rate cut, the first such move for over seven years. The ECB cut the main repo rate by 0.50% to 3.75% and the Federal Reserve also reduced the Fed funds rate to 1.50% to 2.00%.
Central banks are increasingly concerned over the impact of frozen credit markets and are having to consider more decisive action to alleviate stresses. The greater risks to growth and fears over a severe slowdown have increased pressure for lower rates while inflation fears have eased.
There was no major US data, although pending home sales rose by over 7% in August. Before the credit crisis escalated, there would have been optimism that the data signalled a possible recovery in housing, but overall fears over a renewed downturn have intensified. The jobless claims data will be watched closely on Thursday to assess whether there has been a further labour-market deterioration.
Similarly, German industrial production rose by over 3.0% in August following the strong orders data the previous day, but confidence in the Euro-zone economy as a whole has continued to deteriorate.
The trend for yen strength accelerated in Asian trading on Wednesday as regional stock markets were subjected to heavy selling pressure. The Nikkei index fell by over 9% on the day and there was a further defensive flight to the Japanese currency as fear intensified.
Domestically, the Bank of Japan cut its view of the economy due to weak capital spending, but the international stresses were dominant. The yen pushed through the key 100 level against the dollar and tested resistance beyond 135 against the Euro.
The Bank of Japan held interest rates at 0.50% and did not participate in the global interest rate cuts, although it did consider a cut in the Lombard rate. The yen retreated following the rate cuts, but it resisted heavy selling pressure as safe-haven demand was still robust. The dollar edged back to 100.20 as Wall Street attempted to rally.
The government confirmed a package of support for the financial sector on Wednesday with measures including capital injections through government stakes in the main banks.
Measures to boost capital and underpin the sector will underpin confidence to some extent, although sentiment towards the financial sector, economy and currency will remain very fragile on deep recession fears. From a longer-term perspective, there will also be increased fears over the UK budget outlook with borrowing set to rise sharply.
The Bank of England held its monetary meeting 24 hours earlier than scheduled and joined in the co-ordinated interest rate cuts with a 0.50% reduction to 4.50%. The existing yield differential over the dollar and Euro was, therefore, maintained, but markets will expect a series of rate cuts over the next few months.
After initial gains, Sterling weakened sharply with a retreat to 0.7930 against the Euro and fresh 30-month lows below 1.73 against the dollar.
The franc fluctuated sharply against the Euro on Wednesday and eventually strengthened to around 1.54 from lows around 1.5530.
The Swiss National Bank reduced the interest rate band by 0.50%, but it was effectively a 0.25% cut in rates with the bank targeting a 2.50% repo rate from 2.75% previously.
There was still an important element of fear in the markets as carry trades continued to be cut back very sharply and stock markets failed to sustain an initial rally following the interest rate cuts. The franc recovered to 1.1240 against the dollar as demand for the US currency was generally weaker.
The trend for Australian dollar weakness accelerated in Asian trading on Wednesday as regional stock markets were subjected to heavy selling pressure while confidence in the Australian economy also continued to deteriorate. The Australian currency came under heavy and sustained selling pressure and dipped to lows near 0.6750 against the US currency.
Volatility will remain extremely high in the short term and fear will remain the dominant influence. After a brief respite, the currency temporarily dipped to a four-year low below 0.65 before a recovery. There will be pressure for a more durable correction following huge losses over the past week.