Daily Report: Euro Gaps Lower on Deepening Credit Crisis, Dollar and Yen up on Risk Aversion

Euro gaps lower against dollar and yen on worry that credit market crisis is deepening in the Eurozone countries. Germany government was forced to put up a new rescue plan for Hypo Real Estate after German banks and insurers shocked the markets by withdrawing support for the original rescue for HRE. In the new rescue plan, German Government pledged to guarantee private deposits, covering more than 500b euros in deposits. BNP Paribas took over Belgian and Luxembourg businesses of Fortis in a spectacular cross-border rescue. Danish government agreed with banks to set up a $6.5b liquidation fund while the government will guarantee all bank deposits in Denmark. Banks agreed to pay up to $6.5b over two years to take over troubled financial institutions. Iceland prime minister and central banks are holding emergency talks with pension funds to prevent bank meltdown too. Ireland is guaranteeing banks' deposits and debts for two years.

AUD/JPY and NZD/JPY are hardest hit today on risk aversion as Asian stock markets tumble sharply following weakness on Friday's US stocks and news over the weekend. EUR/JPY follows on broad based euro selling. The technical outlook is unchanged so far as medium term down trend in EUR/USD, EUR/JPY, AUD/USD, AUD/JPY has resumed last week and are still in force. A few points to note, though. Firstly, while GBP/JPY tumbles sharply, GBP/USD is still holding above recent low. USD/CHF is also held by recent high. Both are supported by crosses buying in respective Euro crosses. However, both currencies remain vulnerable and will likely clear the way for further decline in near term. Secondly, USD/JPY has finally took out 103.54 support, reaffirming the case that 110.66 is a medium term top. More downside is now expected for the pair. Also, it serves as an indication that yen's underlying strength will likely be stronger than dollar in near term.

Economic calendar is light today with focus on Eurozone Sentix Investor Confidence and Canadian building permits and Ivey PMI featured. The main focus will remain on the development in credit market crisis as well as that in European and global stock markets.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 141.00; (P) 148.04; (R1) 152.12; More.

EUR/JPY's decline extends further, taking out mentioned initial target of 61.8% projection of 169.96 to 147.03 from 156.84 at 142.67. EUR/JPY reaches as low as 139.95 so far and is now close to long term fibonacci support of 38.2% retracement of 88.97 to 169.96 at 139.02. Some initial support could be seen there. Nevertheless, recovery should be relatively brief as long as 146.89 resistance holds and recent decline is still expected to resume sooner rather than later. Next target is 100% projection of 169.96 to 147.03 from 156.84 at 133.91. Though, above 146.89 will indicate that a short term low is formed and bring longer consolidation.

In the bigger picture, the sharp fall from 169.96 is still in progress and should be targeting long term fibonacci level of 38.2% retracement of 88.97 to 169.96 at 139.02. Though some support could be seen there on oversold condition, with weekly RSI deep below 30 level, and bring consolidation. Medium term outlook will remain bearish as long as 156.84 resistance holds and the down trend from 169.96 is expected to extend further to 61.8% retracement of 88.97 to 169.96 at 119.9, which is close to 120 psychological level. However, a break of 156.84 will confirm that a medium term bottom is formed and turn medium term outlook neutral for larger scale consolidation.

Forex News Digest

• Asia-Pacific Market Recap: Stocks Hit New Lows as Global Turmoil Swells
• New Zealand Treasury's Pre-Election Outlook Report Sees Dour Economic Progress
• Wachovia Says Deal With Wells Fargo Still Stands, Citigroup Can Top Offer (Update)
• AU Preview: RBA Forecast to Cut by 50 Bps As Global Credit Crisis Intensifies
• JN Preview: BoJ Won't React by Cutting Their Already-Low Rates, Economists Say
• Euro Reaches 13-Month Low Versus Dollar as Credit Crisis Spreads to Europe
• Yen Unbeatable as Credit Market Seizure Proves the `Carry Trade Is Dead'
• Bernanke May See Lending to Companies, States as Next Credit-Crisis Fronts
• Bank Writeoffs May Triple, Bond Premiums Narrow as U.S. TARP Rescue Begins
• European Credit Crisis Deepens; Officials Pledge to Rescue Troubled Banks
• Australian, New Zealand Dollars Slide as Credit Crisis Damps Risk Appetite

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