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Global Central Banks Cut Interest Rates - Will Confidence Return? (Euro Open)

Thursday, 09 October 2008 04:32:02 GMT  |  Ilya Spivak, Currency Analyst with Luis Gil, DailyFX.com

After a coordinated rate cut by five of the world’s largest central banks, exchange rates remained relatively stable during Asian trading. The day’s Euro and Pound ranges were nothing out of the usual but may be subject to larger swings when German Trade and Wholesale Price data hits the newswire today. Labor data in Australia continued to weaken, signaling the RBA may have been too slow in its fight against credit tightness.

Key Overnight Developments

• FOMC, ECB, BOE, SNB, BOC Cut Rates
• Australian Labor Market Weakens
• Japanese Equipment Orders Plummet


Critical Levels



Rate announcements posed little threat to the Dollar as it remained relatively stable against the Euro. After hitting 1.3605 at the time of the rate decision, EURUSD moved up to a high of 1.3754 before coming down to the present 1.3670. Sterling traders saw a bit more action as the pair hit a high of 1.7587 after the moves by central banks from 1.7437. The pair’s run up came to a screeching halt to fall back down to a low of 1.7165.


Asia Session Highlights



Australians saw their Unemployment Rate rise to 0.2 percentage points to 4.3% in the month of September. The number of people employed rose only 2,200 in September after having risen a downwardly revised 10,200 in August. Meeting analyst forecasts, the weakening labor market comes amid slowing growth in the South Pacific. The weakness comes amid efforts from the Reserve Bank of Australia to fend of credit tightening. Over the last 5 weeks the bank has cut interest rates by 125bp, 100 of which came on Wednesday alone.

The nation’s Consumer Inflation Expectations remained flat at 4.4% in October after falling fuel and credit costs saw the metric fall from June and July highs of 5.9%. Operators and laborers see inflation affecting their pocket books the worst, expecting a 9.9% yearly increase in the general price level.

Japan saw its Machine Orders plunge by -14.5% in the month of August alone after economists estimated the fall to be a meager -2.7%. The three month decline marks the longest retracement the metric has seen since 2001. Such weakness comes as faltering global strength reduces the demand for automobiles and electronics - two industries Japan’s export base depends upon highly.


Euro Session: What to Expect



Germany’s Trade Balance is expected to see the surplus contract to 12.0 billion euro in August as export growth suffers from sagging demand in Germany’s key European markets. The more complete Current Account metric is also seen giving ground, showing a surplus of just 9.0 billion euro in August from 11.8 billion in the preceding month. The capital side is unlikely to have fared much better than the trade side of the equation as German equities, the 10-year Bund, and the Euro all declined. The release of Wholesale Prices is largely moot at this point because the ECB cut interest rates along with other major banks, so clearly inflation considerations have been put aside as policymakers focus on salvaging the credit markets.

In the UK, the Trade Balance is expected see the deficit slightly lower in August as a sharply weaker British Pound and dire economic conditions weighed on demand and crimped import volumes.

The Bank of England produced their interest rate decision ahead of schedule as the world’s top central bankers stepped in boost confidence with a coordinated 50 basis point interest rate cut. This validated what we’ve suggested in this report for several days: the markets’ cheer as the Reserve Bank of Australia cut rates 100bps versus their indifference to yesterday’s token liquidity boosting measures sent a clear message to policymakers on how to proceed. The remainder of the economic calendar will likely take a back seat as markets digest the burst of stimulus. Initial signs are rather mixed: Wall St closed down 2% after a volatile session that saw the Dow Jones Industrial Average flip from positive to negative territory in a matter of minutes. Asian markets opened cautiously lower as well and US index futures are nominally in the red overnight.



To contact the authors regarding this or other articles they have authored, please email them at research@dailyfx.com.

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