Commodity Currencies Plunge on Global Rate Cuts

Daily Forex Fundamentals | Written by CMS Forex | Oct 08 08 22:13 GMT |

The dollar, trading mixed against its rivals Wednesday, was sharply higher against the commodity currencies but lower versus the yen and euro. In an unprecedented move to alleviate the financial crisis and global economic slowdown, major six central banks each cut benchmark interest rates 50 basis points. Sterling fell after the UK government announced a package of new measures to help the banking system which could total £400 billion ($692 billion). The yen gained as risk aversion increased and the coordinated rate cuts failed to cheer stock markets. The Australian dollar plunged the most since 1983.

The USD/CAD advanced and tentatively broke its long-term trend resistance. The pair will likely continue rising as the global economy cools and the commodity boom ends. After reaching a low in November, the pair has moved higher and is currently overbought. We buy the USD/CAD, but also buy the AUD/USD, which has fallen more and is extremely oversold. The AUD/USD buy is a short-term play on an oversold condition.

Financial and Economic News and Comments

US & Canada

US pending home sales unexpectedly rose in August with the NAR US pending home sales index gaining 7.4% m/m to 93.4, the highest level since June 2007, following July's revised 2.7% m/m decline, the National Association of Realtors said. Pending home sales rose 8.8% y/y. The August figures show a favorable sign for the US housing market but may not hold up as the financial crisis worsens.

In an unprecedented coordinated effort, major six central banks cut their benchmark interest rates to combat the current global financial crisis. “The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted,” according to the joint statement. The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Sweden's Riksbank each lowered their key rates by 50 basis points. The Bank of Japan did not participate in the move but said it supported the coordinated action. Separately, the People's Bank of China cut its key one-year lending rate by 0.27 percentage point.

Canadian housing starts unexpectedly rose for a second consecutive month in September, totaling 217,600 units, following August's upwardly revised 217,400, Canada Mortgage and Housing Corp. said.

Europe

The euro-area Q2 2008 GDP contracted 0.2% q/q following Q1's 0.7% q/q increase, final data from Eurostat showed. The Q2 GDP grew 1.4% y/y, down from Q1's 2.1% y/y gain. Government spending rose 0.5% q/q in Q2 after Q1's 0.3% q/q gain, while corporate investment dropped 1.0% q/q after Q1's 0.6% q/q loss. Household consumption fell 0.2% q/q in Q2 after seeing no change in Q1. Overall, the figures show the euroarea economy is on the brink of a recession.

Germany's industrial production unexpectedly gained a seasonally adjusted 3.4% m/m in August, the largest increase since August 1993, following July's revised 1.6% m/m decline, the Economy Ministry said. The August IP unexpectedly rose 1.7% y/y after July's revised 0.1% y/y increase.

The BRC UK shop price index showed annual shop price inflation of 3.6% in September, down from August's 3.8%. This marks the first decline in the index since March 2008, the British Retail Consortium reported.

Asia-Pacific

Economic conditions in Japan showed a sixth straight monthly drop in September with the current conditions index falling to a 7-year low of 28.0 from August's 28.3, according to the Japanese Economic and Social Research Institute's Economy Watchers Survey. However, Japanese merchants were more optimistic about the future outlook with the outlook index rising to 32.1 compared to August's 32.0.

Australian consumer confidence dropped the most in more than two years with the sentiment index falling 11% m/m to 82 in October, a Westpac Banking Corp. and Melbourne Institute survey showed. It is the ninth consecutive number of less than 100, showing pessimists outnumber optimists. The survey result underscores the need for yesterday's RBA 1-percentage-point rate cut.

Australian home-loan approvals fell 2.2% m/m to 48,903 in August, a 7-year low, following July's revised 0.9% m/m decline, the Statistics Bureau said. The August data points to further deterioration in Australian building approvals and starts in coming months.
FX Strategy Update

 EUR/USD  USD/JPY  GBP/USD  USD/CHF  USD/CAD  AUD/USD  EUR/JPY
Primary Trend  Negative  Neutral  Negative  Neutral  Negative  Neutral  Neutral
Secondary Trend  Negative  Negative  Negative  Positive  Positive  Negative  Negative
Outlook  Negative  Negative  Negative  Positive  Positive  Negative  Negative
Action  Sell  Sell  None  None  Buy  Buy  None
Current  1.3628  99.18  1.7283  1.1264  1.1268  0.6628  135.18
Start Position  1.3803  109.45  N/A  N/A  N/A  N/A  N/A
Objective  N/A  N/A  N/A  N/A  N/A  N/A  N/A
Stop  1.4350  106.75  N/A  N/A  N/A  N/A  N/A
Support  1.3500  98.00  1.7200  1.1000  1.0600  0.6500  130.00
1.3000  96.00  1.7000  1.0600  1.0300  0.6300  125.00
Resistance  1.4000  103.00  1.8000  1.1500  1.1300  0.8000  145.00
1.4300  105.50  1.8500  1.1900  1.1500  0.8500  150.00

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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