| Daily Forex Fundamentals | Written by Global Forex Trading | Sep 19 08 06:15 GMT | | |
The Stories in the Currency Market
THE STORIES IN THE CURRENCY MARKET
EXPECTATIONS FOR UPCOMING FED MEETINGS (NEW FORMAT)
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE MARKETS REVERSE ON TALK OF RESOLUTION TRUST CORP - WHAT IS IT AND WILL IT HELP?Over the past few days, the markets have shrugged off the government's bailout of AIG and a flush of liquidity from central banks around the world.No matter what the Federal Reserve or the US Treasury tried to do, they failed to please the markets.However in the last few hours of trading today, a possible resurrection of the Resolution Trust Corp (RTC) sent the stock market surging and gold prices plunging.New traders may wonder what the RTC is and how it can help the markets.The RTC is essential a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets.It was first created as a result of the Savings and Loans crisis of the 1980s.For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.The idea was then floated around by current US Treasury Secretary Paulson this afternoon, triggering the sharp reversal across the financial markets.USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78.However the more important question to ask is whether or not an RTC will help.The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help.According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following: 1. Restores Liquidity Is the US at Risk of Losing its AAA Rating?However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating.On Wednesday, S&P said that “there's no God-given gift of a AAA rating, and the US has to earn it like everyone else.”Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government's debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too.Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn't get its balance sheet into shape by then, the consequences could be even more severe. Fire up the Printing Presses?This is perhaps the reason why the Federal Reserve may consider firing up the printing presses.Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning.To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts.If that doesn't work in stabilizing liquidity, the Federal Reserve can always print money.Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet. US Household Net Worth DwindlingThe US dollar has recovered against the Japanese Yen, but the outlook for the US economy is still grim. For the third quarter in a row, household net worth has declined.Jobless claims surged last week to 455k, but that was largely tied to disruptions from Hurricane Gustav. As the problem in the underlying US economy grows, so does the prospect of an interest rate cut from the Federal Reserve.According to our tables, the market is starting to price in a tiny chance of a 50bp rate cut at the October FOMC meeting. EUR/USD: B ACK TO RANGE TRADINGOver the past few editions of the Daily Currency Focus, we have made a case for the EUR/USD to start range trading.On Monday, we talked about how the year to date range of the EUR/USD is near its 40 year high and on Tuesday, we outlined the reasons why the bottom in the EUR/USD may be real.Unless the European Central Bank agrees to global easing, the EUR/USD may have a tough time breaking its prior low of 1.3882.Right now, they refuse to do so because of inflationary pressures (vis a vis wage negotiations in Germany).However like the Federal Reserve, the ECB has injected a tremendous amount of liquidity into the financial system.Although the US has been hit the hardest by the financial crisis, the Eurozone is not spared and because of that, the ECB is committed to fighting the crisis and helping to restore stability.If the RTC announcement by the US fails to calm the markets and bring down the LIBOR rate and TED spread, which has widened to the highest level since 1984 earlier today, the ECB may have to succumb to global easing. German producer prices are due for release on Friday and we expect the data to be Euro negative, but with macro factors so dominant, the impact on the EUR/USD may be minimal. FSA BANS SHORT SALES, UK RETAIL SALES BLOW AWAY EXPECTATIONSThe British pound soared as retail sales blew away the market's expectations.Despite financial sector turmoil, falling house prices and a weakening labor market, UK shoppers continued to spend.Even though discounts and promotions helped to fuel sales, the resilience of UK consumers is impressive. The pound was also helped by news that Lloyds TSB will be buying HBOS for $22 Billion.They have helped to rescue a troubled bank and preventing the UK financial markets from having deal with a Lehman>STOCKS SEE STRONGEST RALLY SINCE 2002, RISK ON? For the Japanese Yen crosses, the story is always risk on or off.Equities have been week since the beginning of the month and we are finally relieved to report that the S&P 500 saw their strongest one day rally since October 15, 2002 while the Dow Jones Industrial Average which is up 410 points, saw its biggest one day gain since March 2003.As happy as we are about the market's recovery, we are skeptical about whether it will last.Volatility has been elevated across the financial markets - especially for currencies on an intraday basis.Today's rally has been fueled by nothing more than the hope that a new proposal by the US government will restore stability.The proposal has not been approved or finalized which means that the markets could remain nervous.Therefore it is of utmost importance for currency traders to exercise caution in the current market environment. SHARP GAINS FOR CANADIAN, AUSTRALIAN, NEW ZEALAND DOLLARSThe Canadian, Australian and New Zealand dollars saw sharp gains as risk appetite improved.NZD/JPY and AUD/JPY were the day's biggest percentage movers, which helps to explain the similar rise in the NZD/USD and AUD/USD.Gold prices had been up as much as $40 intraday before giving back most of its gains following the RTC announcement. Crude prices continued to trend higher.New Zealand is expected to release their current account data this evening.Given the deterioration in the trade balance during the second quarter, we expect the current account deficit to grow.Like many of the other major currencies, economic data will take a backseat to macro drivers. USD/JPY:CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURSAlthough there is no major US or Japanese economic data over the next 24 hours, we continue to believe that USD/JPY will be the currency in play over the next 24 hours.The Dow has recovered nearly all of Wednesday's losses and if that rally extends into Asia and Europe, we could see further gains in USD/JPY.For the time being, our prior resistance level still holds: The currency pair remains within our sell-zone, which is established by Bollinger Bands.The 106.25-50 level is important because the confluence of Bollinger Band (1st standard deviation), Fibonacci levels, the 10, 100 and 200-day SMA creates stiff resistance.If the currency pair manages to close above 106.25, the downtrend will be broken but as long as it remains below that level, we expect USD/JPY to continue to trickle lower towards its not support at 102.35, the 23.6% Fibo.
Kathy Lien | |
Friday, September 19, 2008
Markets Reverse On TalK Of Resolution Trust Corp - What Is It And Will It Help?
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