Daily Report: Markets Respond Positively to European Rescue Plan

The financial markets respond positively to the European rescue plan announced before market opens. The plan is different from the vague G7 statement and as French President Sarkozy said, it achieved "concrete measures" as well as "unity" across the Eurozone. In short, the plan includes state guarantees on bank debts until the end of 2009 with maturities up to five years. The governments are allowed to recapitalize financial institutions by buying bank stakes with preference shares or other instruments. ECB also pledged to look at enlarging access to the system of guarantees to include commercial paper even though it doesn't have the legal power to do so yet.

Elsewhere, US Treasury Paulson said the US government is speeding up consideration of guaranteeing debt issued by banks, following the European announcement. Fed said that ECB, BoE and SNB will conduct dollar auctions at maturities of 7, 28, 84 days at a fixed interest rate to offer financial institutions unlimited funds in response to demand on dollar loans. UK Government will invest 37B pounds in banks, including RBS, HBOS and Lloyds TSB, to boost their so called Tier One capital ratio to more than 9%. Australian government said it will guarantee all deposit with financial institutions for the next three years and all "term wholesale funding" by Australian banks operating in international credit markets. New Zealand government said it will guarantee retail deposits in New Zealand-registered banks, building societies, credit unions and deposit taking finance companies. G7 vowed that "urgent and exceptional" actions will be taken to "unfreeze credit and money markets" but no detail is given. G20 also pledged to beat the crisis too.

The forex markets generally retrace last week's movements with dollar index sharply down to below 81.5. EUR/USD is back above 1.36. USD/CAD is sent to below 1.17 with crude oil rebounding over 4% to above 81. Yen crosses also recover mildly in general. Nevertheless, key near term levels in major pairs and crosses are still holding and thus there is no confirmation of short term tops and bottoms yet. Japan, US and Canadian markets are closed today and thus the reactions will be delayed to tomorrow.

On the data front, New Zealand retail sales rose 0.4% mom in Aug. Swiss combined PPI dropped more than expected by -0.5% mom in Sep, yoy rate moderated to 3.7% versus expectation of 3.9%. UK PPI is expected to show further moderation in upstream inflation with PPI input down from 26.2% yoy to 19.8%, PPI output down from 9.7% yoy to 8.8%.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 132.69; (P) 134.52; (R1) 136.82; More.

EUR/JPY's recovery from 132.19 extends further to as high as 137.65 today but after all it's still limited below 139.72 key near term resistance. With 4 hours MACD staying above signal line, intraday outlook is neutral for the moment and some more recovery could still be seen. However, there is no confirmation of a short term bottom yet and another fall is still in favor as long as 139.72 resistance holds. Sustained trading below 132.19 low will pave the way to next target of 50% retracement of 88.97 to 169.96 at 129.47. On the upside, though, above 139.72 will indicate that a short term bottom is in place and bring lengthier consolidation. Nevertheless, rebound should be limited below 147.03 resistance and bring down trend resumption.

In the bigger picture, the sharp fall from 169.96 is still in progress and has taken out long term fibonacci level of 38.2% retracement of 88.97 to 169.96 at 139.02 without hesitation. The development so far suggests that fall from 169.96 is developing into a five wave decline and EUR/JPY is probably in the middle of it only. Medium term outlook will remain bearish as long as 147.03 support turned resistance holds and another fall is still expected even in case of correction, targeting 61.8% retracement of 88.97 to 169.96 from at 119.90. Though, break of 147.03 will dampen this view and argue that fall from 169.96 has possibly completed.

Forex News Digest

• EU Leaders Reach Agreement to Combat Financial Crisis (Update)
• Billionaire Investor Soros Slams U.S., EU Officials for Slow Response to Crisis
• Fed Approves Wells Fargo Purchase of Wachovia
• IMF's Strauss-Kahn Supports Euro Zone Credit Crisis Plan
• Australia Guarantees Bank Deposits, RBA Injects A$2.849B into Money Markets
• New Zealand Retail Sales Rise 0.4% in August
• G20 Finance Ministers Endorse G7 and IMF Call to Action
• IMF Says Global Financial System at Brink of Meltdown, Urges Plan
• G7 Nations Agree to "Urgent and Exceptional Action" (Update)
• Euro Rises Most in Three Weeks as European Leaders Offer Bank Guarantees
• Yen Set to Rise to 95 as Carry Trades Will Unwind, JPMorgan's Sasaki Says
• Dollar May Slide to 98 Yen in Coming Weeks on Charts, Forecast's Ng Says
• British Pound Declines Against Euro Amid Concern U.K. Slowdown to Deepen
• Australia, New Zealand Dollars Rise on Local, European Banking Guarantees

More Forex News

Economic Indicators Update

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