by Darrell Jobman, Editor-in-Chief, TradingEducation.com, LLC
Daily currency analysis
for Monday, March 17, 2008
The markets were close to panic conditions early on Monday as financial risk continued to escalate. The sale of Bear Stearns to JP Morgan for US$250mn intensified fears over the scale of bad debts and credit stresses while there were rumours of another round of write-downs. The dollar weakened sharply to near 1.59 against the Euro in Asian trading before finding some support.
The Fed cut the discount rate to 3.25% and also announced further measures to boost liquidity. The central bank will increase lending on its own balance sheet in order to provide greater funding for the major investment houses.
The US growth-related data very weak with industrial production falling 0.5% in February while the New York manufacturing index fell to a record low of -22.2 from -11.7. Given the financial and economic risks, there will be further speculation that the Federal Reserve will cut interest rates by a full 1.0% at Tuesday’s meeting.
The fourth-quarter current account deficit fell to US$173bn from a revised US$177bn previously and this cut the 2007 deficit to US$738.6bn. The deficit is just below 5.0% of GDP which will ease underlying fears very slightly, although the deficit is still at an unsustainable level. Long-term capital inflows were little changed at US$62bn for January while overall capital inflows were lower.
ECB sources voiced concern over the recent dollar moves against the Euro, but they also stated that this did not necessarily mean that there would be intervention. Markets will continue to be on high alert over intervention with the dollar settling close to 1.5730 in New York. There will be some further speculation over an emergency ECB meeting if stresses continue to increase.
Fear and risk aversion intensified further in Asian trading on Monday with the dollar weakening towards the 96.0 level against the yen with the biggest US currency decline for over eight years.
The Finance Minister stated that the authorities were concerned over excessive moves in currencies, but there was no evidence of actual intervention. It is certainly the position that the intervention threat is at the highest level for many years given the fresh instability and risk of a vicious circle over credit liquidation.
There was a tentative dollar recovery in European and US trading towards 97.50, but the US currency was still unable to make much headway as risk aversion remained at elevated levels.
The intensification of risk aversion pushed the UK currency weaker in Asian trading on Monday with the UK currency weaker than 0.79 against the Euro on a liquidation of carry trades before a weak recovery. Sterling also struggled to make any headway against the dollar, testing levels below the 2.00 level despite dollar vulnerability. The trade-weighted index also weakened to a fresh 11-year low.
There were further UK money-market stresses on Monday with Libor rates rising. The Bank of England also announced an emergency funding facility of GBP5.0bn in an attempt to ease stresses which undermined the UK currency.
There will be further unease over the economy in the short term, especially given the importance of the UK financial sector. There will also be further inflation concerns, especially if the latest consumer inflation data records a sharp increase to above 2.5% on Tuesday and volatility will remain very high.
Swiss franc remained strong on Monday, although it did retreat from the highs seen in Asia. The franc peaked at stronger than 1.54 against the Euro and also strengthened to 0.9635 against the dollar before correcting weaker.
Underlying risk aversion will remain very high in the short term which will provide important background support to the Swiss currency.
National Bank president Hildebrand voiced concerns over the inflation rate in comments on Monday, dampening any expectations of lower interest rates. The SNB also stated that the franc rise was a concern, although it was too early to say whether the gains would be sustained.
The Australian dollar weakened sharply in Asian trading on Monday as elevated risk aversion following the Bear Stearns collapse triggered a move back into the Japanese currency. The Australian currency weakened to lows towards the 0.92 level against the US dollar before a limited correction.
A tough stance in the Australian Reserve Bank minutes would reinforce the strong yield support for the Australian currency, although international risk considerations will remain dominant for now. A further increase in fear would undermine the Australian dollar and increased risk aversion pushed the currency back to lows below 0.9150 in New York before a tentative recovery.