Dollar and Yen Soars on Liquidation and Repatriation

TODAY'S BIGGEST PERCENTAGE MOVERS

• AUD/JPY (-386 pips or -6.34%)
• NZD/JPY (-293 pips or -5.66%)
• CAD/JPY (-392 pips or -5.14%)

THE STORIES IN THE CURRENCY MARKET

• USD: Dollar and Yen Soars on Liquidation and Repatriation
• GBP: Headed Towards 1.4500
• EUR: Swiss Central Bank Surprises With Rate Cut
• CAD: Prime Minister Pledges Economic Stimulus
• AUD: RBA Intervenes in Currency
• NZD: NZD Hits 5 Yr Low, Oil Prices Fall to $48.95
• JPY: How Much Further Can Stocks Fall

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

US DOLLAR: SOARS ON LIQUIDATION AND REPATRIATION

The financial markets have been very schizophrenic today indicating that investors are still nervous. It was another roller coaster session in US equities with the Dow hitting a 5 year low shortly after the market open, recovering all of those losses and tacking on an additional 190 points by lunchtime before giving it all back to end the day down a whopping 444.99 points. The US dollar and Japanese Yen have soared in response to the liquidation and repatriation. Although today's US economic releases were very weak, the big focus was on the auto industry. The initial turnaround in the markets was driven by the news that Senators have reached a compromise on a rescue plan for the auto industry. However when it was later revealed that no deal has yet to be reached and that any decision would not be made until Congress returns the week of December 8th, the selling resumed.

Auto Industry Bailout Plan: Biggest Risk This Year?

On Monday, we had said that a bailout of General Motors would be the biggest risk this month, but with Congress delaying action, it is now becoming increasingly clear that an auto industry bailout may be the biggest event risk this year. Senate Majority Leader Harry Reid said this afternoon that the Big 3 Automakers need to submit a plan on how they will be using the funds to make sure their businesses survive before lawmakers can agree to “show them the money” (a quote from House Speaker Nancy Pelosi). The big sticking point in Washington is not necessarily whether the bailout will happen but where the money will come from. Some lawmakers want it to come from the TARP rescue fund while others want to tap the $25B that has been approved and allocated for the development of fuel-efficient vehicles. Either way, judging from the price action in the financial markets today, equity and currency investors want the government to extend a lifeline to automakers and they want it soon. The longer this gets drawn out, the more it will hurt the market's risk appetite.

Rising Jobless Claims Makes 8% Unemployment Growing Possibility

Every single day we have more reason to believe that the US unemployment rate will break 8 percent next year. Jobless claims rose to a 16 year high of 542k last week while continuing claims rose to 4.012 million, the highest level in nearly 26 years. The most powerful aspect of today's report is the fact that the Veteran's Day Holiday usually pushes jobless claims down which suggests that if there wasn't a holiday, jobless claims could easily surpass 550k. Non-farm payrolls dropped 240k in October and 284k in September. Recent jobless claims reports suggest that non-farm payrolls will fall by more than 300k this month and unfortunately if past recessions can be a guide that will not be the bottom in the labor market. In analyzing non-farm payrolls data during the last 3 recessions, we see that at the beginning of an official recession, as defined by the National Bureau of Economic Research, non-farm payrolls start to decline rapidly. However after falling between 200k and 300k, job cuts stall and then pick up once again. We saw this trend in the 1981 to 1982 recession, the 1990 to 1991 recession and during the 2001 recession. Therefore don't expect the labor market to stabilize anytime soon - non-farm payrolls should top -300k, stabilize and then revisit that level once again in the first half of 2009.

Federal Reserve Extends December FOMC Meeting to 2 Days

With jobless claims shooting higher and manufacturing conditions in the Philadelphia region hitting 18 year lows, an interest rate cut by the Federal Reserve on December 16th is a given. However since interest rates are already at 1 percent, the Federal Reserve needs to put some serious thought into how much they will cut interest rates and what will they said about rates going forward. Therefore it is not much of a surprise surprise that the FOMC has extended their monetary policy meeting in December to 2 days instead of 1 so that they have enough time to deliberate. The big question is, will the Fed tell the markets that zero interest rates are not out of the question - in our opinion, they will be forced to so. There are no economic releases on the US calendar Friday but a number of Fed officials including Bullard, Plosser and Evans will be delivering speeches tomorrow.

USD/CHF: CENTRAL BANK SURPRISES WITH 100BP RATE CUT

Every major currency pair broke out today with the exception of the EUR/USD, which remained contained within a 150 pip trading range. Even EUR/GBP, which is typically seen as a range trading currency pair had a 168 pip range while EUR/CHF had a 239 pip range. The market expected German producer prices to ease in October, but instead inflationary pressures held steady. With the Eurozone in a recession, the European Union is crafting a stimulus package for the 27 nation economy. The stimulus package which is expected to be around $130 Billion Euros and each country may have to contribute about 1% of their GDP. The stimulus package is expected not to follow the route taken by the United States, although it is still targeting the crises that originated from the financial turmoil. Interestingly enough, the big action in Europe came from Switzerland, who shocked the markets with a 100bp intermeeting rate cut. Since the beginning of the year, the SNB has reduced interest rates by 175bp, reflecting their growing concern that Switzerland will take a big hit from the global slowdown next year. With the mid point of the SNB's 3 month LIBOR target range now at 1.00 percent, the dovish comments in the central bank statement suggests that interest rates will continue to fall. Switzerland's rates now matches that of the US, which puts both of them at risk of taking rates down to zero. The advance releases of the purchasing managers' indexes for the Eurozone are due for release tomorrow and judging from the problems around the world, there is no reason to expect the numbers to be pretty.

GBP/USD: HEADED BACK TOWARDS 1.4500

After consolidating for the past 2 trading sessions, the British pound has weakened significantly and may be on its way to 1.4500. Even though UK retail sales dropped for the second consecutive month, the 0.1 percent decline was far less than the market's -0.7 percent forecast. However there is a lot of reason to be concerned when looking at the details of the report which indicate that the primary increase in spending was for food sales, which is a basic necessity. Spending on non-food items like household goods and clothing decreased, indicating that Britons are cutting back on their discretionary spending. After the Bank of England minutes revealed that they considered a larger rate cut, I warned that once the euphoria surrounding the proactiveness of the central bank passes, the British pound would resume its weakness against the US dollar and the Euro. That is exactly what happened today and we continue to believe that the currency is in for more losses.

USDJPY: HOW MUCH FURTHER CAN STOCKS FALL?

The Japanese Yen crosses are once again trading in lockstep with US equities, which have plummeted today. The Dow Jones Industrial Average dropped 5.56 percent while the S&P500 tumbled 6.7 percent to the lowest level in 11 years. Even though the Bank of Japan has an interest rate decision this evening, it will matter little to the currency markets, especially since no changes are expected from the central bank. Instead, everyone will continue to keep their eyes locked on stocks and wondering how much further it can fall. The recent sell-off in US equities is strikingly similar to the Panic of 1907. In 1907, the last leg lower in the Dow was the 37% decline that lasted from the second quarter to the fourth quarter. So far this year we have only seen a 36.3% decline from the August high of 11867 and a 37 percent decline would bring the Dow down to 7475.

AUSTRALIA INTERVENES, CANADA PLEDGES TO PROVIDE STIMULUS

Another day of liquidation has led to a dramatic decline in the Australian, New Zealand and Canadian dollars. The Australian dollar has suffered the most, falling more than 4 percent against the dollar and more than 6 percent against the Japanese Yen. This has forced the Reserve Bank of Australia to intervene in its currency again by buying Australian dollars this evening. Unfortunately, currency interventions do not have a good track record and we fear that the RBA's efforts will yield little results. Meanwhile Canada's Prime Minster Harper has pledged to provide short term economic stimulus to support the economy. With plans to continue to cut interest rates, the Canadian government is doing all that they can. Wholesale sales rose 1.5 percent in September which was a bit of a surprise; consumer prices are not expected to fare as well tomorrow. Today's liquidation has driven the New Zealand dollar to a 5 year low.

EUR/JPY: Currency in Play for the Next 24 Hours

The currency in play for the upcoming 24 hours will be EUR/JPY based on the release of Japan's monetary policy decision which should be around 1am ET or 6am GMT and the Euro-zone's Purchasing Managers Index at 4AM EST or 9AM GMT.

The Euro depreciated against the Yen today, as risk aversion continued to drive the markets. The pair entered into a sell zone of the Bollinger Bands, with a break of the falling wedge. With a bias to the downside and increased volatility, the Euro has a potential to test the level not seen since 2002, established on October 27th at the price of 113.62. If the long-term support is broken, we potentially can expect a substantial sell-off in the Euro. A perfect order of moving averages still shows negativity in the pair. The shorting of the euro will be negated upon the break of the resistance, which is placed at the top of the first Bollinger Band at the price of 121.00.

Kathy Lien
http://www.gftforex.com

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