Mid-Day Report: Dollar and Yen Retreats, Fed to Buy Commercial Paper

Dollar and yen continues to retreat today following higher open in the US stock markets with Dow back above the psychologically important 10,000 level. Dollar index is back below 81 level as dollar retreats. Oil recovers mildly to above 91 level while gold surges further to above 880 level. Markets is entering into a short term consolidation phase which could saw dollar and yen retreats further in the next few days. However, the overall outlook remains unchanged. As mentioned before, the deepening in global credit markets triggers speculation of coordinated central bank actions and markets are cautious on dumping stocks further at this level. Thus, the world's financial markets could stabilize a bit after yesterday's spike low and another round of panic selling would probably be delayed after the rumors of coordinated rate cuts becomes news. Technically speaking, we'd expect Dow to plunge further to below 9000 level after the current recovery and thus, another round of yen, and to a lesser extent dollar, buying is still expected after the current consolidation.

To further stabilize the credit markets, Fed announced that they will buy "commercial paper" to support financing needs of corporations. The $99 b daily market of commercial paper has virtually dried up recently which made it increasingly difficult for corporations to raise short term money. Such unstable situations will leave many companies vulnerable. Fed will create special fund to purchase from eligible issuers three-month dollar denominated commercial paper at a spread over the three-month overnight-indexed swap rate. the paper purchased by the vehicle must be rated at least A1/P1/F1.

RBA surprised the markets by cutting one full percent point, the most since 1992, to bring Overnight Cash Rate down to 6.00%, doubling expectation of 50bps cut. Governor Stevens said that "conditions in international financial markets took a significant turn for the worse in September." "Demand and output could be significantly weaker than earlier expected" due to deterioration in global growth prospects and difficult credit market conditions. Hence, "an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers."

BoJ left rates unchanged at 0.50% as widely expected. Japanese leading indicators dropped more than expected by -2.1% in Aug.

Economic data released today saw Japanese leading indicators dropped -2.1% in Aug. UK industrial production deteriorated further to -2.3% yoy in Aug with Manufacturing production dropped further to -1.9% yoy. Germany factory order rose 3.6% mom, dropped -7.6% yoy in Aug. FOMC minutes of Sep meeting will be released later in the US afternoon.

GBP/JPY Mid-Day Outlook

Daily Pivots: (S1) 172.37; (P) 179.19; (R1) 184.34; More

GBP/JPY recovers after hitting long term trend line support at 174.64. Break of 180.64 indicates that an intraday low is in place and further consolidation could be seen. Nevertheless, upside of recovery is expected to be limited below 188.58 resistance and bring fall resumption. Below 174.03 will indicate decline from 197.42 has resumed for next short term target of 100% projection of 215.87 to 184.47 from 197.42 at 166.02.

In the bigger picture, 180 psychological support is taken out decisively. GBP/JPY is now pressing long term rising trend line support (129.32, 148.19). Sustained trading below will encourage fall to next medium term target of 100% projection of 251.09 to 192.60 from 215.87 at 157.38 and probably further to 148.19 low. On the upside, above 197.42 is needed to confirm that a medium term bottom is formed. Otherwise, outlook remains bearish.

Forex News Digest

• Tuesday's Events: Fed's Bernanke, ECB's Trichet to Speak, FOMC Minutes
• Global Central Banks Continue USD Liquidity Provisions
• Fed's Lacker Says Recession Likely But Rate Cuts Won't Help, Says WSJ
• Overnight News Recap: RBA Cuts 100 Bps, Icelandic CB Bailed Out By Russia
• Russia to Lend Landsbanki €4 Billion, Says Iceland's Central Bank
• German Factory Orders Surprise to the Upside in August
• UK Industrial Production Index Falls Below Expectations in August
• Uncertainly, Downside Growth Risks Delaying Recovery, Says BOJ's Shirakawa
• BoJ Holds Rates, Again - But Would They Cut if Global Banks Asked Them To?
• RBA's Surprise 100 Basis Point Cut To Blunt Global Credit Shock, Economists Say
• Japanese Yen Falls From Three-Year High Against Euro on U.K. Bank Talks
• Bernanke, Paulson, Trichet May Try to Unblock Bank Loans, Commercial Paper
• Canada's Dollar Declines for a Fourth Day Amid Global Economic Slowdown
• U.K. Pound Falls Against Dollar, Euro as Manufacturing Declines in August
• Australian Dollar Pares Decline After Central Bank Slashes Interest Rates

More Forex News

Economic Indicators Update

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