New Overnight Developments Abroad: Interbank Market Improved a Little Further

October 21, 2008

The dollar touched new 2008 highs against the euro of $1.3210 and Swiss franc of 1.1547/Chf.  The dollar rose 2.0% against the Australian dollar, 1.3% against the New Zealand kiwi, 0.8% against both the euro and sterling, 0.6% relative to the Canadian dollar and 0.2% versus the Swissy.  The buck fell 0.6% against the yen.

The cost of dollar funding declined in Asia.  Euroibor rates also continued to edge lower, marking the longest streak of daily declines since January. But ECB executive director Stark warned that no major breakthrough has yet occurred.  Many central banks injected funds at varying maturities: e.g., BOJ, RBA, ECB, SNB, and Bank of England.

France provided EUR 10.5 bn of funds to recapitalize banks. Paris Cac jumped 2.4% in response. German Dax and British Ftse are trading 1.1% and 0.9% higher.

Stocks in Asia closed broadly mixed.  Advancing bourses included Japan (3.3%), the Philippines (2.6%), Vietnam (2.5%), India (4.5%) and Indonesia (0.9%). Australia also rose (3.9%), but Sri Lanka (-2.3%), Hong Kong (-1.8%), South Korea (-1.0%), Singapore (also -1.0%) and China (-0.8%) closed lower.

Sovereign bond yields eased in Japan (-2 bps to 1.58% on 10-year) and Europe. A 30-year JGB auction drew the best cover ratio in two years.

Prices for oil (-0.6% to $73.77) and gold (-0.8% to $783.40) are softer.

Consumer prices in New Zealand advanced 1.5% in 3Q, resulting in the highest 12-month gain (5.1%) since 2Q90. The Reserve Bank of New Zealand as a result may not cut its cash rate by a full percentage point, but a decline of at least 75 basis points remains probable later this week.

Minutes from the October Reserve Bank of Australia meeting attributed the 100-bp rate cut to financial turmoil and a much worse global growth outlook, but it suggested that future relief will come in smaller increments.

Swiss exports tumbled 8.2% m/m in September.

In Britain, the monthly CBI industrial trends survey showed a drop in orders to -39 from -26 in September. Market analysts anticipated a score of -30. Expectations for prices and production were at their lowest levels since July 1980.

In China, corporate goods price inflation slowed to 7.0% in September from 8.2% in August and 10.3% last April. Fixed asset investment prices accelerated in 3Q and posted an on-year increase of 10.3% in January-September compared to 10.0% in 1H08.

German real construction orders fell 7.3% in the year to August, a further sign of recession.

The Bank of Canada will likely announce another rate cut at 13:00 GMT. I look for a 50-bp reduction, but a 25-bp cut is also possible. The BOC reduced its target rate to 2.5% from 3% on October 8th. Some Canadian data have turned out better than expected, e.g. growth in jobs, but exports continue to be very depressed, falling in volume terms by 1.5% in August from July and by 7.7% from August 2007. Canada is very exposed to a serious U.S. recession and had even weaker growth in 1H08 than its southern neighbor. U.S. weekly chain store sales get released today.

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