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German factory orders jump 3.6% in Aug

Wed, Oct 8 2008, 09:44 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Fed comments hit USD. Markets were quick to pounce on comments from Fed Governor Bernanke that the “outlook to economic growth has worsened” and that Fed will “need to consider whether the current stance of policy remains appropriate.” This was taken as a clear sign that the Fed Governor has now fully about faced the outlook for monetary policy as the credit crises continues to deepen and is now prepared to cut rates. The USD weakened on the news, and EUR raced to a high of 1.3739. Weakness in US stocks also added to the sell dollar story. Concerns over the Morgan Stanley deal with Mitsubishi saw USD/ JPY slammed to a low of 101.29. And yen crosses reversed at least some of the Asian session rally. AUD/JPY for instance hit a high of 75.76 after the RBA cut rates by an unexpected 100bps and carry bounced. Weakness in US stocks saw some of those gains reversed. AUD/JPY slid back to the 72.50 to 73.00 region.

Other news saw the UK Chancellor Darling announce that a UK will reveal the full details of a bank plan which will include “an element of recapitalisation” tomorrow. The Chancellor noted that “The Bank of England has been putting substantial sums into the markets today and it is ready to do more when that is needed”. European bank stocks were slammed first up with HBOS and RBS down by 40% and Lloyds down by 13%. HBOS shares sit at about 50% of the price implied by the Lloyds offer implying the City has very little confidence that the deal will go through.

AUD and NZD saw some reprieve as the focus was very much on Europe and the US. The AUD hit a high of 0.7330 in early NY trading after a better US equity open and news the Fed would soon allow high grade CP as collateral. However, the lack of Central Bank follow through to the RBA move saw the AUD start to slide. When ‘Fed time’ came and passed with no change, the AUD slid back sub 0.7100 again. We currently sit just sub 0.7150. The NZD also saw gains, opening around the 0.6350 level in NY as markets speculated on coordinated Central Bank rate cuts. However, as cuts failed to emerge, the NZD also slid and we sit round the 0.6280 level. The continued weakness in US stocks and lack of Central Bank action is likely to weigh on both currencies in Asia.

US Fed chair Bernanke hints at rate cut. In a speech to US economists, he said that the Fed “will need to consider whether the current stance of policy remains appropriate”, given the credit freeze, recession fears and diminishing inflation concerns. In other news, the Fed announced further liquidity measures, this time the creation of a Commercial Paper Funding Facility.

The minutes of the 16 September FOMC meeting revealed that some members were leaning towards a rate cut, though apparently not enough to vote for it. The committee noted that “inflation risks appear to have diminished”, and that a policy response could be required if the strains on the financial sector threatened the outlook for growth - which increasingly appears to be the case.

German factory orders jump 3.6% in Aug. The first rise in orders this year – actually not good news if it provides the ECB with an excuse not to cut interest rates!

UK industrial production down 0.6% in Aug. IP has not posted a gain since February. It is increasingly clear that the UK economy is already in recession.

Outlook

A reluctance to enter fresh trades in the current volatile environment appears to be helping NZD versus AUD but we suspect that data revealing another weak quarter in Q3 will leave the kiwi vulnerable to selling on key crosses in coming days and weeks. NZD/USD looks to have further to fall.

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Published on  Wed, Oct 8 2008, 09:48 GMT