Conditions within the global economy and financial markets continued to dominate market sentiment during the week. The fragile nature of confidence was illustrated by sharp currency moves with spikes down in carry-related currencies.
The US currency overall remained on the defensive following the weak payroll report at the end of last week.
The minutes from March’s FOMC meeting recorded that some members were concerned over the risks of a severe slowdown in the economy. In contrast, another camp was concerned over the inflation outlook, illustrating the difficult task faced by the Fed over the next few meetings.
Markets were split on expectations for the Federal Reserve rate decision with futures markets indicating similar probabilities of a 0.25% or 0.50% cut at the late-April policy meeting.
The US trade deficit rose to US$62.3bn in February from a revised US$59.0bn the previous month. There was a surprisingly strong increase in imports while there was a solid rise in exports for the month.
Initial jobless claims fell to 357,000 in the latest week from a revised 410,000 the previous month which eased immediate fears over the labour market to some extent, although the housing-sector data remained generally weak.
At the latest council meeting the ECB left interest rates un changed at 4.00%. In the press conference following the rate decision, ECB President Trichet took a similar line as in recent meetings with further warnings over the need to control inflation.
He also warned that the financial-market difficulties would last longer than expected which triggered some speculation that the bank was preparing the markets for a shift in policy later in 2008 if conditions failed to improve.
The Euro retained a generally strong tone over the week, although it was subjected to bouts of profit taking against all major currencies. The Euro was boosted by reports of sovereign buying during the week, especially from Asia. The dollar was unable to strengthen through the 1.5610 level against the Euro and weakened to fresh all-time lows around 1.5910 before a renewed correction in choppy trading.
The Japanese currency moves were again influenced strongly by degrees of risk aversion and the yen strengthened sharply as global markets were subjected to renewed selling pressure.
After two rejections, agreement was reached on the nomination of Shirakawa as Bank of Japan governor, although Watanabe’s nomination as Deputy Governor was rejected
At the latest council meeting, interest rates were left on hold at 0.50% while the Bank of Japan downgraded its assessment of economic conditions within the economy.
The dollar was unable to push above resistance in the 102.80 region against the yen and weakened rapidly to lows near 100 on Thursday before an equally sharp recovery back to 101.80. Volatility continued on Friday with the dollar retreating to 101.00.
The Swiss franc found support near the 1.02 level against the dollar and strengthened sharply back to around 0.99 before correcting weaker again. The franc found support close to 1.5950 against the Euro as volatile trading persisted.
The Bank of England cut interest rates by 0.25% to 5.00% following the latest monetary Policy Committee meeting. The bank stated that it expects inflation to fall later in 2008, especially as some spare capacity could emerge.
The bank was also concerned over the tightening of credit standards. The breakdown of the vote will not be known until the minutes are released in two weeks time.
The housing data remained weak with the Halifax Bank reporting that house prices fell by 2.5% in March which was the biggest monthly decline for 12 years. There was also further evidence of tightening conditions within the mortgage market while consumer confidence also continued to weaken.
The visible trade surplus was reported at GBP7.5bn for February from a revised GBP7.9bn the previous month as imports were significantly lower. There was some optimism over investment flows after RWE’s approach for British Energy.
Sterling has remained on the defensive over the past week. The UK currency weakened to record lows against the Euro around 0.8035 and struggled to make any headway against the dollar.
Darrell
Jobman is Editor-in-Chief of www.tradingeducation.com, which provides free daily and weekly
commentaries for traders as well as complimentary trading tutorials, and eBooks.
He is an acknowledged authority on the financial markets and has been writing
about them for more than 35 years.
