EUR/US$
The Euro failed to hold above 1.27 against the dollar in early Europe on Tuesday and dipped to lows near 1.26 as risk appetite deteriorated again. A late rally on Wall Street pushed the Euro back to 1.27.
The US data releases maintained the very weak tone seen over the past few weeks and will reinforce fears that the downturn accelerated during November.
The latest ADP report recorded a decline in private-sector employment of 250,000 for November after a revised decline of 179,000 the previous month. This was the largest decline on record, although the data series is relatively short. The latest figure on layoffs also recorded an annual increase of close to 150%.
The ISM index for the services sector also weakened sharply with a decline to 37.3 for the month from 44.4 previously. The components within the index were all depressed with particular concern over the employment and exports components which were both below the 35.0 level.
The impact of lower bond yields was illustrated by the latest mortgage application data with the weekly total rising by over 100% as re-mortgaging activity surged. This trend also illustrates why the Fed is considering buying Treasury bonds to keep yields down.
There was a 0.8% decline in Euro-zone retail sales for October, maintaining the run of weak data. The ECB will be an important focus on Thursday with markets pricing in a further interest rate cut of at least 0.50%. As well as the rate decision, the comments from ECB Chairman Trichet will be very important. The markets will, to some extent, reward a pro-active stance by the ECB, although the markets will also be looking for a measured tone and volatility is liable to be high.
Yen
There was a rally in Asian equity markets which dampened yen support to some extent. The global interest rate decisions will remain an important focus over the next 24 hours. A continuation of sharp rate cuts following the 1.50% cut by the Reserve Bank of New Zealand would continue to lessen yield support and tend to discourage capital flows from Japan which would maintain underlying yen support.
There will, however, also be some hope that the action will help stabilise the global economy which would help underpin wider risk appetite. Without a sustained improvement in risk appetite, the yen should retain a firm tone.
The Japanese currency tested levels near 92.50 later in the day following the stream of weak US data with some reports of Far East dollar buying near this level pushing the US currency back above 93 in New York.
Sterling
Sterling remained under pressure on Wednesday with renewed losses against the dollar and Euro. After dipping to lows beyond 0.86 against the Euro and 1.47 against the dollar, Sterling struggled to gain any respite.
The economic data remained depressed with the services-sector PMI index weakening to a fresh all-time low of 40.1 for November from 42.4 previously. The weak survey will maintain pressure for an aggressive interest rate stance by the Bank of England, although the central bank’s mandate is only to target inflation and the MPC will need to take Sterling depreciation into account.
Markets will also be looking at the statement closely and a substantial rate cut, coupled with a suggestion that there will now be a pause, would be likely to provide some Sterling support.
Swiss franc
The franc dipped to lows around 1.2170 against the dollar on Wednesday and also lost some ground against the Euro even though risk appetite was generally weak.
National Bank Chairman Roth stated that the economy was likely to contract in the fourth quarter of 2008 and the first half of 2009. He stated that the Swiss outlook was better than that in other countries with the downside limited by the measures already taken. He also indicated that rates would be cut again at the December meeting and, in this environment, the franc will struggle to secure strong support.
Australian dollar
The Australian dollar dipped back towards the 0.64 level in local trading on Wednesday, although it managed to resist heavy selling pressure. The Australian currency is still being undermined by fears over the global economy and downward pressure on commodity prices. There will still be some optimism that action by global central banks and governments will help trigger a recovery next year.
The currency struggled to make any headway as it was undermined by a stream of very weak global data, but there was some support below the 0.64 level with potential support on valuation grounds.
