Currency news - Mortgage rescue triggers further volatility

Mortgage rescue triggers further volatility - 08-09-08

The US non-farm payroll data recorded an employment decline of 84,000 in August from a revised 75,000 drop previously, the eighth successive monthly decline with falls across most sectors. Unemployment rose sharply to 6.1% from 5.7% compared with expectations of a slight increase at worst as the household survey recorded a sharp decline in employment.

The data will reinforce unease over US economic trends and cast further doubt on any possibility of an interest rate increase over the next few months. There will also be some speculation that there will be a Fed shift back towards an easing bias.

Over the weekend, the US Administration announced a Federal support package and effective takeover for the US mortgage finance companies Fannie Mae and Freddie Mac. The move will ease immediate fears over the US and global financial system and offers some hopes or a stabilisation in the mortgage sector.

There will still be fears over the economy while there will be increased fears over the budget deficit which will pose very important longer-term dollar risks as there is liable to be heavy new bond issuance to support the mortgage companies which will cause major medium-term fiscal stresses.

The improvement in risk appetite will also tend to reduce immediate upward pressure on the dollar as position adjustment eases. The dollar dipped to around 1.44 against the Euro on Monday before regaining ground sharply in volatile trading with a move to fresh 11-month highs of 1.4180.

Tim Clayton
Investica Ltd
E-mail: tim.clayton@investica.co.uk
+44 (0) 1452 781001

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