by Darrell Jobman, Editor-in-Chief TraderPlanet.com

Trends in the global economy remained an important focus during the week. Investor attitude towards risk, commodity prices and carry trades were key market aspects and contributed to a sharp increase in volatility. The renewed fears over credit conditions discouraged risk taking and there was a sharp unwinding of positions over the week.

The US currency gained support from the sharp reduction in carry trades and a net shift of capital flows into the US currency as fears over the trends in other major economies and emerging markets intensified. The net decline in commodity prices was also a positive net dollar factor as positions were reversed.

As far as the economic data is concerned, the PMI index for the manufacturing index was little changed at 49.9 from 50.0 the previous month while the prices index was lower. The services-sector index rose slightly for the month to 50.6 from 49.5, but there was weakness in the employment component while prices rose less strongly.

The labour-market data remained less favourable with initial jobless claims rising to 444,000 in the latest week from a revised 429,000 previously while continuing claims also continued to rise strongly. The latest ADP employment survey also recorded a 33,000 decline in private-sector employment for August. The monthly non-farm payroll data recorded an 84,000 decline in employment while the unemployment rate rose to a 5-year high of 6.1% from 5.7% which triggered some renewed dollar selling.

The Fed’s Beige Book reported that the economy was generally weak with a retrenchment in consumer spending while the labour market was soft. Overall pricing pressures were still important, but wage increases appeared under control. There was little overall move in interest rate spreads, but expectations of an interest rate increase this year continued to fade slightly.

The Euro-zone economic data remained weak and provided no support to the Euro. Retail sales data continued to fall with a further 0.4% decline for July after a revised 0.9% decline the previous month.

Germany remained an important focus and there was a further 1.7% decline in factory orders after a 2.6% decline the previous month. This was the eighth successive monthly decline for orders which increased economic fears.

The ECB left interest rates at 4.25% at the council meeting. In the press conference following the decision, Chairman Trichet repeated that the growth risks were skewed to the downside. The central bank head also warned over consumer prices with a statement that inflation would stay above target for a prolonged period. There was a particular focus on wage pressures and the need to avoid secondary inflationary effects.

US Dollar Index
Source: VantagePoint Intermarket Analysis Software

The dollar has retained a strong tone over the week with the currency strengthening to fresh 11-month highs on a trade-weighted basis. It also strengthened to 2008 highs against the Euro with a peak around 1.42 on Friday before weakening after the payroll data.


The Japanese currency resisted selling pressure and gained strongly over the second half of the week from the unwinding of carry trades. The yen advanced to highs around 105.50 against the dollar and also pushed sharply stronger against the Euro with a 13-month peak stronger than 151.0.

The Swiss currency also strengthened sharply against the Euro as risk aversion increased. In contrast, the Australian dollar came under further pressure with a decline to lows below 0.81 against the US currency with the local currency also undermined by a Reserve Bank interest rate cut.

The UK currency was hurt badly by the comments from Chancellor Darling who warned that the economic conditions could be the worst for 60 years. Recession fears were reinforced and the OECD was also very cautious over the UK prospects.

British Sterling
Source: VantagePoint Intermarket Analysis Software

The PMI data was slightly better than expected for August. The manufacturing sector index rose to 45.9 from 44.1 previously while the services-sector index recovered to 49.2 from 47.4, although they remained below the 50.0 threshold for expansion.

The government announced a package of measure to support the housing sector with a reduction in house-purchase tax for the next 12 months, but overall confidence in the housing sector remained very low. Mortgage approvals dipped to record lows of 35,000 in July as credit conditions remained tight while bank lending was subdued.

The Bank of England left interest rates on hold at 5.00% following the latest policy meeting. There was no statement or vote split by the bank following the meeting.

Sterling remained under pressure during the week with the trade-weighted index falling for 12 consecutive days before staging a weak correction. The UK currency dipped to lows below 1.76 against the dollar while it found support close to 0.8180 against the Euro in very choppy trading conditions.