Mid-Day Report: Markets Stabilized after Central Bank Actions, Dollar Still Weak

Markets stabilize a bit after world's major central bank's concerted effort to inject liquidity into the markets as well as talk of mergers of financial institutions. Morgan Stanley is believed to be beginning official merger talks with Wachovia. Nevertheless, funds are still flow out from US dollar to other European majors and commodities. EUR/USD finally broke 1.4481 near term resistance and is still strong. Sterling is additionally supported by better than expected retail sales report from UK. Crude oil is now back above $100 again while gold remains firm around $880 level.

Fed, ECB, BoJ BOE and BoC announced coordinated effort to almost quadrupled the amount of dollars central banks can auction around the world to ease the east the crisis in short term dollar funding markets. Central banks can now auction up to a total of $247b, up from $67b. In other words, a total of $180b is additionally injected into the markets. Under the arrangement, ECB doubled its limit of dollars it can get from Fed from $55b to $110b. SNB had extra $15b to offer, up from $12b to $27b. BoJ, BoE and BoC can offer $60b, $40b and $10b respectively. The arrangements are authorized until Jan 30, 09.

SNB left three-month Libor unchanged at 2.25-3.25%, mid point at 2.75% as widely expected. Data released today saw US jobless claims climbed to 455k. Canadian leading indicators rose 0.3% in Aug. Wholesale sales rose 2.3% mom in Jul. UK Retail sales was surprisingly strong, rising 1.2% mom in Aug comparing to expectation of -0.5%. Yoy rate jumped to 3.3%. Swiss trade surplus narrowed less than expected to 1.43b. Philly Fed index and US leading indicators will be released in the US session later.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4138; (P) 1.4261; (R1) 1.4447; More

EUR/USD edges higher to 1.4542 in early US session, taking out 1.4481 resistance. Rebound from 1.3881 is still in progress and further rise should be seen to 1.4629/4908 resistance zone. Though, since such rally from 1.3881 is treated as correction to sharp fall from 16038 only, upside is expected to be limited by 1.4629/4908 resistance zone and bring fall resumption. On the downside, below 1.4281 minor support will turn intraday outlook neutral first. Further break of 1.4071 will flip intraday bias back to the downside for retesting key medium term support at 1.3851 (50% retracement of 1.1639 to 1.6038 at 1.3839).

In the bigger picture, medium term up trend from 1.1639 has completed at 1.6038, after a double top reversal pattern (1.6019, 1.6038) and subsequent decisive break of medium term rising trend line support. While a short term bottom is likely in place and corrective rebound should be seen, the whole decline from 1.6038 is still expected to extend further after completing the correction. Sustained trading below 1.3851 will indicate that fall from 1.6038 has resumed to next target of 61.8% retracement of 1.1639 to 1.6038 at 1.3319 first. On the upside, sustained break of double top neckline resistance at 1.5284 is needed before considering that decline from 1.6038 has completely finished.

Forex News Digest

• Reserve Bank of Australia Does Not Follow Central Bank Initiatives
• BOJ's Shirakawa Announces USD Liquidity Provision
• BOJ Holds Emergency Meeting, Leaves Rates Unchanged, Says BOJ's Nishimura
• Central Banks to Conduct Coordinated Actions to Reduce Tension in Money Markets
• UK Retail Sales Surprise to the Upside in August
• Dollar Falls Against Euro as Central Bank Action Eases Demand for Currency
• Canadian Dollar Rises as Central Banks Support Markets and Oil, Gold Gain
• Financial Meltdown Exposes Flaws in U.S. Economy, Tarnishes American Image
• Fed, Central Banks in Europe, Japan, Canada Pump Cash Into Credit Markets
• Money-Market Rate for Dollars Slides After Coordinated Central Bank Action
• Swiss Franc Climbs Against Dollar as SNB Keeps Interest Rates Unchanged

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