Trading Education.com FX update

The state of the US economy remained a key market influence and there was a notable deterioration in market confidence during the week.

The US data was generally weak with durable goods orders falling by a further 1.7% in September while the underlying increase was held to a weaker than expected 0.3%. The latest jobless claims data was also higher than expected at 331,000 for the latest reporting week, maintaining unease over labour-market trends.

The housing sector remained under pressure with existing home sales falling by a further 8.0% in September to give an annual rate of 5.04mn, the lowest rate since the current series started in 1999. There was a monthly recovery in new home sales, but this reflected a sharp downward revision to August’s data.

Markets moved to price in fully a 0.25% Federal Reserve interest rate cut next week while there was increased speculation over a second successive 0.50% rate cut.

Investment bank Merrill Lynch moved to increase its bad-debt write-downs in the latest week while there were rumours of substantial AIG losses which renewed credit fears in global markets.

At last weekend’s G7 talks, the US administration appeared to reject European calls that there should be a stronger statement opposing further dollar weakness against the Euro. G7 repeated their call that excessive exchange rate volatility should be avoided.

The Euro-zone PMI manufacturing index weakened significantly for the second month running with a decline to 51.5 in October which was the lowest reading for 26 months. The services-sector PMI was more robust with a monthly increase.

The German IFO index edged lower to 103.9 in October from 104.2 while the IFO institute was generally optimistic over economic trends. German consumer confidence weakened over the month.

The dollar strengthened to 1.4125 against the Euro on Monday, but then reversed course and was subjected to persistent selling pressure with a drop to a record low around 1.4375 on Friday. There were reports of strong sovereign Euro buying support which helped the currency regain ground.

The latest UK data recorded a slowdown in the housing sector with a drop in BBA mortgage approvals to 52,700 in September from 61,100 the previous month while overall mortgage lending also dropped.

The CBI survey recorded a significant deterioration with the orders component weakening to -6 in October from +6 previously while business confidence fell to a 20-month low.

MPC member Barker expressed caution over the immediate need for lower interest rates. The Bank of England, however, issued a cautious statement by pointing to commercial and financial-sector vulnerability to shocks. Markets continued to price in a rate cut within the next few months. Sterling moves remained correlated with global stock market moves and levels of risk aversion with choppy trading against the dollar.

Sterling was unable to sustain levels stronger than 0.6950 against the Euro. The UK currency found support below the 2.03 level against the dollar and climbed back to challenge levels above 2.05 as the US currency came under renewed selling pressure.

Commodity-related currencies secured important support during the week from the high level of commodity prices and the general loss of confidence in the US dollar. The Australian and Canadian dollars dipped early in the week, but the Australian dollar then pushed to highs above 0.91 against the US currency while the Canadian dollar strengthened to a 33-year high near 0.96.

The Japanese corporate services prices index rose 1.4% in the year to September, but there was no significant shift in interest rate expectations as core consumer prices fell 0.1% over the year.

The Japanese yen moves were correlated strongly with moves in global stock markets with the yen securing some support from a firmer tone in Asian currencies and persistent upward pressure on the Chinese yuan.

The yen traded within a 113.30 – 115.0 range against the dollar during the week and there was a increase in volatility against the Euro with the yen weakening beyond 164.0 on Friday.

Have a great day and a wonderful weekend.