FX News

FX News

USD Rebounds on Govt Action
Possible AIG Bailout Calms Market
Market Turmoil Sends JPY Soaring
Global Growth Slowdown Spark USD, JPY
USD Edges Higher, Oil Retreats
USD Supported by Bailout Plan
Yen Rallies, Traders Await Jobs
USD Rebounds on Govt Action

The dollar edged higher in early Friday trading, rising above the 106-figure versus the yen and pushing the euro lower toward the 1.42-region. A relief rally in US equity bourses reversed earlier losses, with the Dow Jones Industrial Average closing the Thursday session 3.86% higher and the Nasdaq up by 4.78%. The advance in the greenback and stocks was prompted by discussions for the creation of a government-sponsored entity that would remove “the illiquid assets on bank balance sheets that are the underlying source of the current stresses in financial institutions and financial markets”. In doing so, the government aims to restore confidence in the recently battered financial industry following the string of failures and halt any additional fallout on the already slumping economy.

Global central banks announced coordinated efforts to pump massive amounts of liquidity into the financial system to alleviate “continued elevated pressures in the US dollar short-term funding markets”. The BoC, BoE, ECB, SNB, BoJ and Federal Reserve increased their swap lines to provide improved liquidity in both term and overnight operations by more than $180 billion.

The US economic reports released on Thursday included weekly jobless claims, which jumped to 455k from 445k in the previous week, the August leading indicators and the September Philadelphia Fed survey. The August leading indicators index came in at -0.5%, improving from -0.7% from July while the Philadelphia Fed business survey unexpectedly increased to 3.8 versus -12.7 in August. There are no data releases slated for the Friday session with market movements largely dictated by any new revelations over the government’s ongoing efforts to resolve the current crisis and turmoil in the financial markets.
Possible AIG Bailout Calms Market

The dollar regained its footing against the majors in New York trading following a volatile session of sharp movements– recovering above the 106-handle against the yen and moving back toward the 1.41-region versus the euro. Fears of an impending collapse of insurance giant AIG were tempered amid speculation of a government bailout with rumors for a potential $85-$90 billion bridge loan being extended by the Federal Reserve. The US equity bourses also recouped some of Monday’s sharp losses, with the DJIA edging higher by 1.3% and the Nasdaq up by 1.28%.

The FOMC left interest rates unchanged at 2.0% when it announced its monetary policy decision on Tuesday afternoon, revealing a unanimous vote to stand pat. Although Fed acknowledged that “strains in financial markets have increased significantly and labor markets have weakened further”, it stuck to its mantra that “the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth”. The FOMC maintained its neutral outlook citing lingering inflation with a highly uncertain outlook.

The economic reports released saw August CPI ease somewhat, with the headline CPI figure posting a 0.1% drop versus an increase of 0.8% in the previous month and lower at 5..4% compared with 5.6% a year earlier. The core CPI figures declined as well, easing to 0.2% from 0.3% in the previous month and unchanged on an annualized basis at 2.5%. Meanwhile, the July overall TIC flows posted a $74.8 billion net outflow compared with a $51.1 billion inflow from June.
Market Turmoil Sends JPY Soaring

Heightened risk aversion dominated the markets at the start of the week amid a fresh bout of turmoil in the financial sector. The combination of Lehman Brothers filing for Chapter 11 bankruptcy, Merrill Lynch being acquired by Bank of America and fears of AIG teetering near the brink sent ripples through the major equity bourses with the Dow Jones plummeting by 4.42%, the Nasdaq lower by 3.6% and the S&P 500 plunging by 4.71%. The yen advanced sharply across the board as traders unwound risky positions, rallying toward the 104-level against the dollar and advancing to the 186-region versus the sterling.

Earlier in the session, credit rating agency S&P’s cut the long-term rating for AIG from AA- to A-, citing a “combination of reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses”.

A barrage of US economic reports is slated for release on Tuesday, including August real earnings, CPI, net Treasury capital flows, and the September NAHB housing market index. The key highlight for tomorrow will be the FOMC’s monetary policy decision, due out at 2:15pm. Prior to the events this week, the Fed was largely expected to leave rates unchanged at 2.0%. However, given the failure of Lehman Brothers and burgeoning fears of a domino effect on Wall Street as the malaise spreads under the increased scrutiny of counterparty risk, the Fed may be compelled to slash rates by 25-bp tomorrow to 1.75%. With crude oil retreating beneath the $100 per barrel level to a new 7-month low at $95.11, the easing of inflationary pressure will provide the FOMC with more leeway to stimulate the struggling economy with additional policy easing.
Global Growth Slowdown Spark USD, JPY

The key gainers in the currency market for the Wednesday session were the yen and dollar, both advancing sharply amid heightened risk aversion over mounting fears for a global recessionary environment. Crude oil also slumped, falling to its lowest level in 8-months at $100.32 per barrel as traders continue to anticipate a slowdown in demand in the near-term, prompted by deterioration in global economic fundamentals.

The economic reports earlier in the session saw a larger than anticipated US trade deficit, which burgeoned to its highest level since March 2007. Consensus estimates were expecting the July trade deficit to increase to $58.0 billion from $56.77 billion previously, instead the deficit swelled to $62.2 billion for July versus an upwardly revised $58.84 billion deficit in the month prior. The exports component hit a record, up 3.3% to $168.15 billion compared with $162.79 billion from June, while imports also expanded to record levels, increasing by 3.9% to $230.35 billion versus $221.65 billion. The July oil import price was up 6.4% to a record $124.66 per barrel. With oil retreating sharply from the record levels in July, we look for the deficit to pull back somewhat over the coming months. Also released were weekly jobless claims, which edged up marginally to 445k from 444k a week earlier.

The dollar surged to a near one-year high against the euro at 1.3881 and a fresh 2 ½-year high versus the pound at 1.7443. Lingering fears over the scope for a recession to hit the UK in the coming months continue to drag the sterling lower. The catalyst for the sell-off was comments from BoE Board Member Blanchflower, who expressed fears that job losses may triple amid a larger than expected decline in the UK economy. Meanwhile, traders shrugged off comments from BoE Governor King, suggesting interest rates may remain on hold in the interim. King, speaking before the Treasury Committee, said that while the growth outlook had deteriorated, inflation had also increased, potentially sparking further increases in wages.
USD Edges Higher, Oil Retreats

The dollar touched a fresh 11-month high against the euro just above the 1.40-level and held steady near 2 ½-year highs versus the pound at 1.7540. The greenback continues to remain favored amid burgeoning fears of rapidly deteriorating economic fundamentals, which consequently sent crude oil to an intra-day low at $101.43 per barrel. Also propping the dollar higher was the announcement from Lehman Brothers to sell off parts of its business to shore up its balance sheet, thereby tempering market jitters in the interim.

Traders will look ahead to US economic reports slated for release Thursday morning, consisting of the July trade deficit, weekly jobless claims and the August Federal Budget. Consensus estimates expect the trade deficit to edge higher to $58 billion in July, versus a $56.77 billion deficit from the previous month. Weekly jobless claims are seen little changed at 440k versus 444k from the prior week. Meanwhile, the Federal Budget is forecasted to shrink to $106.2 billion for August, compared with $117.0 billion a month earlier.
USD Supported by Bailout Plan

The greenback was bolstered by the US government¡¯s decision to bail out Fannie Mae and Freddie Mac, announced Sunday by US Treasury Secretary Hank Paulson, sending the dollar to its highest level since October 2007 against the euro at 1.4059. Paulson said that ¡°Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe¡±. The intervention comes amid burgeoning fears that the mortgage lenders would default, sending ripples throughout the financial system and exacerbating an already sluggish economy. Traders overseas lauded the bailout, sending the Nikkei index higher by almost 3.4%, the FTSE-100 up by nearly 4% while yields on US Treasuries rose higher as well.

US economic reports due out in the Tuesday session include July pending home sales, seen declining by 1.1% in July from a 5.3% increase in the previous month and July wholesale inventories. Key data highlights for the coming week include July trade balance, August retail sales, PPI, the University of Michigan consumer confidence survey and July business inventories.
Yen Rallies, Traders Await Jobs

The yen rallied sharply across the board, advancing to 186.20 against the sterling, 150.59 versus the euro and 105.71 to the dollar. With global equity bourses posting sharp losses, traders scaled back carry trades as a result of the heightened risk aversion. Meanwhile, the greenback jumped to its highest level since October 2007 against the euro at 1.4213 and a fresh 2 ½-year high versus the pound at 1.7562.

The key highlight in the Friday session will be the US labor report for August, with consensus estimates calling for a loss of 75k jobs in non-farm payrolls versus a loss of 51k jobs from July. The unemployment rate is seen remaining unchanged at 5.7% while average earnings are also expected to hold steady at 0.3%.

Although US economic fundamentals continue to deteriorate it remains to be seen when a shift toward an easing stance by the FOMC will materialize given the current inflationary outlook. Dallas Fed President Fisher expressed concerns over inflation, saying “it is pretty clear that trend consumer price inflation has accelerated over the past few months”. Further, he added that “while it seems pretty clear that economic momentum is slowing, the jury is out on whether lesser momentum will be sufficient to translate into the relief on the price front over the intermediate to longer term”. Fisher expects the economy will “suffer anemic growth for the current and perhaps next couple of quarters”. We expect the Fed to leave rates unchanged over the remainder of the year, and foresee a shift toward interest rate cuts in Q1 2009.