US Dollar And Japanese Yen Pull Back As Confidence In And Expectations For Bailouts Rise

Daily Forex Fundamentals | Written by DailyFX | Dec 09 08 01:59 GMT |

US Dollar And Japanese Yen Pull Back As Confidence In And Expectations For Bailouts Rise Euro Rallies Against the World's Most Heavily Traded Currencies. But Will It Last? Commodity Currencies Ride On Higher Oil, But It's Back To Interest Rates Tuesday US Dollar And Japanese Yen Pull Back As Confidence In And Expectations For Bailouts Rise Though market direction has died down over the past month-and-a-half, the primary driver for the currency market remains risk sentiment. Looking to price action through Monday's session, it would seem that risk was back 'on.' Both the US dollar and Japanese yen were on the chopping block so to speak as fundamental optimism gained traction through the many policy authorities around the globe working closer towards a solution that perhaps spans national boarders (like the global markets) or otherwise sparks long-lost investor confidence. The main story for the day was the progress being made on a bailout plan for the major US auto-manufacturers. Many politicians and economists have made the argument that should one of the 'big three' fail it could be the catalyst for the until-now painful recession to become a severe one. Acknowledging the urgency of the issue, Congress announced optimism that it was close to a deal. However, upon closer examination of this proposal, there is genuine reason to doubt that this shift of resources from Wall Street to Main Street will be the turning point for risk appetite. First of all, to qualify for funds, the firms will need to prove their long-term viability - a difficult objective considering the major firms are now on the verge of bankruptcy. What's more, the initial details of the plan spell out a mere $15 billion for the rescue proposal. This is far short of what would likely be needed to keep these firms afloat; and is likely aimed at holding the industry over until the changeover to the new government. So, what will be the turning point for risk trends (and likely the US dollar)? That is still unclear. However, current efforts have done little to restore stability to the financial market. In fact, a report from the Bank of International Settlements (BIS) today suggests that guarantees and unlimited liquidity from central banks is actually discouraging financial institutions from taking on the risk of lending to each other. Outside the pull of risk sentiment, there were few notable economic indicators crossing the US wires Monday morning. However, a CNN poll could help guide forecasts for the severity of the nation's recession through the holiday season. A survey of 1,096 adult Americans revealed 67 percent of respondents said they would cut back on their holiday spending in light of the economic downturn. Also noteworthy was the reading that 38 percent were cutting back on electricity and 31 percent on necessities. This is not surprising given the current level in some of the sentiment gauges, but it does signal that pessimism is finally translating into spending. We will look for confirmation from Friday's retail sales. Euro Rallies Against the World's Most Heavily Traded Currencies. But Will It Last? The euro started the week in a very strong note on speculation that a new wave of stimulus plans engineered by a number of governments across the world could lead to a general recover in the appetite for riskier assets like higher yielding currencies and stocks. The euro appreciated against many of the world's most heavily traded currencies but its strength was particularly evident against lower yielding currencies like the Japanese yen and the U.S. dollar. In fact, the EUR/JPY climbed to as high as 120 yen per euro from a low of 117.89 on Monday. However, even though there are some reasons for renewed optimism, we remain very pessimistic about the euro-zone economy and we have been arguing that a considerable deterioration of the euro zone economy in 2009, could lead to a significant shift of interest rate differentials in favor of the U.S. dollar and keep the EUR/USD under pressure over the next few months. Moreover, it is also becoming clear that the ECB possibly underestimated the size of the financial crisis by keeping interest rates too high for too long. In fact, according to the latest Sentix survey which has more than 2,900 European investors as respondents, investor confidence fell to a new record low in December on fresh concerns that a world recession could hurt European companies, the Germany based Sentix research institute said today in a statement. Commodity Currencies Ride On Higher Oil, But It's Back To Interest Rates Tuesday Key commodities were on the rise through the active New York session Monday. And, while the Australian, New Zealand and Canadian dollars were no doubt bolstered by the 7 percent advance in crude and 2.3 percent rise in gold; the rise in natural resources was secondary to the broader improvement in risk appetite. However, like the rebound in rebound in risk appetite, the rise in these majors is likely to be short-lived. Event risk today showed that housing prices in New Zealand fell 6.8 percent in the year through November, matching the record decline from the previous month. The ongoing drop merely confirms the RBNZ's policy efforts up to this point have done little to improve credit conditions and consumer sentiment in New Zealand. Similar sentiment was garnered for Canada in that nation's housing starts report for November. According to the Canada Mortgage and Housing Corp. construction on single and multiple family dwellings cooled to an annual pace of 172,000 in the year through November. This was the slowest pace in 10 years and confirms the BoC's forecasts that the housing sector would falter and detract from growth in 2008 and 2009. Speaking of the Bank of Canada, their rate decision scheduled tomorrow represents top event risk for Tuesday. A 50 basis point rate cut is relatively modest; but their economy has also proven more resilient. There is plenty of room for surprise in this event. DailyFX