TradingEducation.com, Darrell Jobman, Editor-in-Chief
, 10-21-2008 at 07:12 PM (457 Views)
Daily currency analysis for Monday, October 20, 2008
The Euro pushed to a high above 1.35 against the dollar on Monday, but failed to sustain the advance and then weakened sharply to lows below 1.33 in US trading. There was a significant decline in US Libor rates which should have lessened US currency support, but there was still evidence of firm demand, possibly in connection with the Lehman Brothers credit derivatives which are due for settlement on Tuesday.
There will be further unease over the Euro-zone economy while the Dutch government provided support for the ING banking group. There will also be expectations of a series of ECB interest rate cuts which will hamper the Euro as the German bund-US dollar two-year yield spread dipped towards the lowest level of the year.
There were no major US data releases with markets focussing on the comments from Fed Chairman Bernanake. The Fed chief remained generally downbeat on US prospects with a warning that the US was in a very serious slowdown while sectors such as auto sales had fallen sharply. Other Fed Governors were also generally very cautious over growth prospects, although they also referred to the global risks.
Bernanke was generally receptive to the potential for a second fiscal stimulus and hope of pro-active action provided support to the US currency. The budget speculation also maintained hopes that the US economy will be the first major economy to rebound and the dollar will gain some support as global fears intensify. Nevertheless, there are very important US fundamental risks and confidence in the US currency could still erode rapidly.
Overall, confidence towards international financial markets has stabilised, but sentiment will be brittle. Domestically, the Bank of Japan warned that global weakness was risky for fragile Japan and there will be further speculation that the Japanese authorities will resist any substantial yen appreciation to ease economic pressures.
Risk appetite was slightly stronger on Monday and the dollar advanced to test levels 102.20 against the yen with some reduction in speculative yen positioning.
Global stock markets remained generally firmer, but the yen found some renewed support against major currencies as the Euro and Sterling were subjected to renewed selling pressure. General unease over global growth prospects will also tend to underpin the yen and it regained early losses against the Euro while consolidating around 101.70 against the dollar.
The UK currency pushed stronger in early Europe on Monday and pushed above 1.75 against the dollar, but then dipped sharply to lows near 1.71. Sterling also failed to hold a 7-month peak against the Euro at close to 0.77.
There will still be major fears over the economy and further pressure on the Bank of England to cut interest rates again. The Rightmove organisation reported a 4.9% decline in asking prices for October, even though there was a monthly increase in prices. The ITEM group forecast that the economy would contract by 1.0% during 2009.
The UK data recorded a larger than expected government borrowing requirement with the seven-month deficit at a record GBP37.5bn. The widening deficit is likely to be a small negative factor for Sterling, especially as it will reinforce fears over economic weakness. This should have only limited near-term impact with a reduction in UK banking-sector demand for the dollar offering some protection.
The dollar proved resilient against the franc on Monday and pushed to 2008 highs above 1.15 in US trading. The franc was generally weaker against the Euro.
There have been further stresses within Eastern European economies as market fears increased and this also maintained expectations that borrowing in the Swiss currency will decline. This trend could be important in supporting the franc over the next few weeks, especially if capital outflows from Eastern Europe increase.
A wider easing in fear curbed franc support on Monday as credit spreads eased and stock markets attempted to rally.
Risk appetite has improved and this will provide some support to the Australian currency, especially if a more robust tone in global stock markets can be retained for several days.
Comments from the Reserve Bank will be watched very closely in the short term with some potential scaling back of expectations over a very aggressive easing policy by the bank on interest rates. The currency implications will be mixed as markets will still be looking for the central Bank to cushion the economy. The Australian dollar consolidated near the 0.70 level and proved more resilient to wider US currency gains. The currency will still be hampered by fears over the global economic outlook.
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