Knee-jerk volatility gripped forex markets overnight as the Euro and British Pound swayed back and forth in wide 100-200 pip ranges. The hopeful tone from yesterday’s Australian interest rate cut was disappointed as token measures from the Fed and other bankers were brushed aside. The markets appear to be sending a message to policymakers: cut rates and confidence will return.
Key Overnight Developments • Bank of England Should Cut Rates 0.5%, Says NIESR • Westpac Says Consumer Confidence at Record Low in October • Japan Merchant Sentiment Lowest in 7 Years Critical Levels The Euro oscillated in a choppy 100-pip range around the 1.36 mark. Sterling offered similar price action but wider ranges, testing as high as 1.76 only to repeatedly fall back towards 1.7425. Asia Session Highlights The NIESR Gross Domestic Product Estimate suggests the UK economy shrank -0.2% in the three months through September. This marks the first full quarter of negative growth in 16 years. The accompanying statement sent a blunt message to policymakers: “we take the view that the Bank of England should cut the interest rate by half a percentage point at its next meeting.” Mervyn King and company are set to announce interest rates at 11:00 GMT on Thursday morning. Bond yield forecasts call for borrowing costs to decline 50 basis points in the fourth quarter, though there is no indication whether the BOE will do this at once or in 25bps increments. Westpac Consumer Confidence plunged by the most in 2 years in October, printing at -11.0% versus 7.0% in the preceding month. Australian consumer spending fell to the lowest level in 5 years in the three months through June, growing at just 0.2%. Yesterday, the Reserve Bank of Australia cut interest rates by 100 basis points. Governor Glenn Stevens said that he now sees the potential for output to decline faster than originally forecast, citing “a material change” in the risk outlook as international financial markets have taken a “significant turn for the worse”. Japan’s merchant sentiment continued to decline as the Eco Watchers Survey set a fresh 7-year low at 28.0 in September. The world’s second largest economy is now formally in recession having seen economic growth print negative in the second quarter. Yesterday, the Bank of Japan kept interest rates at 0.5%, saying that “economic growth has been sluggish and these conditions may persist for some time.” Euro Session: What to Expect France’s Trade Balance is expected to see the deficit contract to -4.5 billion euro in August from -4.8 billion in the preceding month. The improvement will likely come courtesy of lower import volumes on the back of sharply lower oil prices and diminished consumer demand. That said, a decline in exports opens the door for a downside surprise: the nation’s top five trade partners are other EU nations and slumping economic conditions across the region will see softer demand for French products. Indeed, the final revision of the Euro Zone’s second-quarter Gross Domestic Product figure is expected to confirm that the region’s economy shrank -0.2% in the three months through June. In an advance release of its World Economic Outlook, the International Monetary Fund forecast sharp declines in growth rates for the EZ’s top economies in 2009: France economy is expected to add just 0.2% while German economic expansion grinds to a standstill. Speaking directly to the ECB, the report concluded that “there is now scope to ease monetary policy.” On balance, price action is likely to continue taking cues from risk sentiment as markets hold out hope that the world’s top central banks will step in to bolster credit markets. Yesterday, the markets cheered as the Bank of Australia cut interest rates by a full 100 basis points: Australia’s benchmark S&P/ASX 200 index added about 2% and US equity indices rose an average of 1.3% while Treasuries, the US dollar and the Japanese Yen declined. This sent a clear message to policymakers: cut rates and confidence will return. Today, token measures from the Federal Reserve and another liquidity injection from Asian authorities failed to stop the bleeding: The Fed announced a new liquidity-boosting scheme to buy short-term corporate debt as Chairman Ben Bernanke opened the door to rate cuts, questioning whether policy rates “remain appropriate” given current turmoil; Meanwhile, central bankers in Japan and Australia injected another $22 billion of liquidity in the market while the Hong Kong Monetary Authority cut interest rates by 100 basis points. Even a new plan from the UK rescue plan offering a 250 billion pound bank lending guarantee another 50 billion pounds in new available capital did not seem to satisfy risk averse investors. Asian stocks took sharp losses with the Nikkei down over 9%, European index futures were down 5% befor the open, and US index futures were down an average 1.5%. This puts the need for meaningful near-term central bank action in sharp relief, futher fueling speculation of a coordinated rate cut in the near term. Related Articles: Fed Announces the Creation of a Commercial Paper Funding Facility, But Stocks Fall More Than 500 pts Forex Technicals: The Day Ahead, October 8 To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.