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Staggering volatility in equities drove similarly wild moves in FX and bonds

Mon, Oct 13 2008, 05:42 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Staggering volatility in equities drove similarly wild moves in FX and bonds, with USD emerging stronger by the NY close. Indeed USD Index hit another new 15 month high as demand for dollars remained elevated. The DJIA traded a phenomenal 1018 point range, closing -128pts (-1.5%) with some hope that the G7 would announce a radical market-boosting step such as a G7-wide interbank lending guarantee.. This did not eventuate, so equity futures are likely to be biased lower yet again to start the week. NZD/USD traded a 0.5889 – 0.6063 range in NY, finishing around 0.5945.

The Australian dollar was the whipping boy once again, smashed as low as AUD/ USD 0.6330, closing a cent above the lows but obviously very vulnerable near term. Commodity prices were crushed.

The late equity recovery pushed USD/JPY higher, closing around 100.65 as the yen retained its status as a vital risk barometer.

EUR/USD traded below 1.3300 at one point as dollar strength also helped slash 10% from NYMEX crude oil futures to $77.70/bbl.

US trade deficit narrows to $59.1bn in Aug. The trade deficit narrowed in August as imports fell away more sharply than exports. Oil imports fell $6.1bn (a function of both lower volume and price) so excluding oil the trade deficit actually widened, despite quite broad-based weakness elsewhere in imports, except for pharma (up 23%) and apparel (10%). On the export side, autos were down 14% and consumer goods down 6%, with some offset from a 2% rise in capital goods and a 32% jump in aircraft. Thus far in Q3, the real deficit has averaged about 9% per month lower than in Q2, so net exports should make another decent contribution to Q3 GDP growth, probably preventing a negative outcome despite the expected contraction in consumer spending. Also, import price data for September (down 3.0%) show that energy imports continued to slump in price, but other imports seem to be cheaper as well, probably a function of the past few months’ appreciation in the US dollar.

Canada posted its fastest monthly jobs gain in more than thirty years in Sep. The detail makes the 107k gain look a bit suspicious: most of the gain was in parttime work, and the new workers were matched by an increase in labour force size, so the jobless rate did not change. Also, there was a sharp fall back in July jobs that was due to be reversed at some point. So, they are the caveats, but as the data stand, it does seem that thus far the Canadian job market has been pretty well shielded from American economic weakness and the turmoil now causing such anxiety in global financial markets.

Canadian trade surplus C$5.8bn in Aug. The wider trade surplus was mainly due to weaker imports of commodities (due to price) and autos, more than offsetting softer exports. Also, new house prices stalled back in August. The last time they declined in the month was back in 1998.

French industrial production fell 0.4% in Aug but Italian industrial production rose 1.4%. Recall that German IP, released earlier last week, jumped 3.4% in Aug. This means that Tuesday’s IP report for Euroland should record a solid August gain comfortably above 1%.

The G7 leaders agreed on guidelines for addressing the financial crisis, including measures to prevent large bank failures, unfreeze credit markets and ensure access to liquidity. However, the meeting failed to produce any joint action, and in the meantime the member countries are continuing with their own piecemeal rescue efforts.

Outlook

We see further downside on NZD/USD as risk appetite remains at rock bottom. However, the kiwi may continue to benefit on cross rates from a lack of interest in entering short positions on such an illiquid currency and very few (or no) kiwi longs to be unwound.

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Published on  Mon, Oct 13 2008, 05:45 GMT