Dollar Falls by Most Since 1999, Paulson's Bailout Plan Fails to Please the Markets
TODAY'S BIGGEST PERCENTAGE MOVERS
- USD/CHF (-310 pips or -2.80%)
- EUR/USD (+310 pips or +2.15%)
- EUR/NZD(+415 pips or +1.95%)
THE STORIES IN THE CURRENCY MARKET
- USD: DOLLAR FALLS BY MOST SINCE 1999
- EUR:500 PIP RALLY PUTS 1.50 WITHIN REACH
- GBP:RALLIES AS BOE FAILS TO COMMIT TO CUTTING RATES
- JPY: BE CAREFUL OF THE CARRY TRADE RALLY
- CAD: OIL SEES BIGGEST ONE DAY MOVE SINCE 1984
- AUD: GOLD RISES ABOVE $900
- NZD:DOLLAR WEAKNESS AND COMMODITY PRICES DRIVE NZD HIGHER
EXPECTATIONS FOR UPCOMING FED MEETINGS (NEW FORMAT)
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE
DOLLAR FALLS BY MOST SINCE 1999, PAULSON'S BAILOUT PLAN FAILS TO PLEASE THE MARKETS
The last thing that US Treasury Secretary Paulson probably hoped for when announcing his $700 Billion bailout plan was the price action that we saw across the financial markets today. Rather than stabilizing or calming the markets, the destruction of the US balance sheet has triggered the largest drop in the US dollar against the Euro since its inception in 1999 and the largest single day rise in oil prices since 1984. The Dow Jones Industrial Average closed down 372 points, indicating that no one is satisfied with Paulson's bailout plan. With the details of the plan yet to be hashed out, the one thing that is certain is that US taxpayers will have to foot the bill, which is ultimately negative for the US economy. The US is surrendering free-market capitalism which is very unattractive to foreign investors.
Flight to Quality into Commodities and Out of the US Dollar
As the US fiscal position deteriorates, the only trade that has been benefitting is long commodities. In addition to the sharp rise in oil prices, gold prices are now trading above $900 an ounce. Less than 2 weeks ago, they were trading below $750 an ounce. For central banks and sovereign wealth funds, the bargain basement prices of commodities have made oil and gold extremely attractive investments, especially at a time when investments anywhere else have become far less certain. For a country like China that is continuing to modernize, their energy needs are expected to grow. Therefore no time is better than now to stock up on commodities that have some real value. Although their pockets are deep, they have certainly taken a hit in their US financial sector investments. Three state owned banks invested as much as $350 million into Lehman Brothers over the past year and that investment is now worth zero. The only true haven for safety is in gold because there is no counterparty or credit risk.
US Dollar Could Fall Another 5 Percent
Unfortunately this is not the first time that the US government has paid “Cash for Trash” as Paul Krugman writes in today's NY Times. A more recent example of a government buying up bad debt was Japan in 1996. They created the Resolution and Collection Corporation which is similar to a Resolution Trust Corp in that they would acquire and then dispose of troubled paper that belong to failed institutions in an orderly manner. Although the Japanese Yen rallied briefly after the announcement, it proceeded to fall 12 percent over the next 12 months. Against the euro, the dollar has fallen 6 percent over the two weeks while the dollar index has fallen 5.5 percent. This suggests that if the dollar were to follow in the Yen's path, we could see another 5 percent decline before the currency hits a bottom.
Watch Out for Paulson, Bernanke and G7 Meeting
Even dollar bears have to be careful in the current market environment because the only thing that is assured is volatility. Paulson and Bernanke will be testifying on the credit turmoil at the Senate Panel tomorrow morning - they will try again to calm the markets which could lead to a relief rally in the US dollar and in US stocks. This morning, the G7 pledged to act if necessary. With the next meeting of finance ministers scheduled for October 10, the Group of Seven may be signaling some sort of coordinated action if all else fails. If the move is in currencies, they would want to talk up the dollar because it adds pressure on commodity prices, giving relief to consumers globally.
EUR/USD: 500 Pip Rally Puts 1.50 Within Reach
On Friday, when the EUR/USD was trading at 1.4350, we said that a rally to 1.45 was possible but 1.50 was unlikely.However with today's 5 cent rally, 1.50 is now within reach.Given that today's move was the largest since the launch of the Euro, it was unexpected and unprecedented.The rally was due to entirely to selling of US dollars as the EUR/USD trailed gold prices higher.ECB President Trichet added his two cents this afternoon when he said that they are alert on the financial crisis and that they have no responsibility for bank solvency.In other words, Trichet is telling us that he is not hesitant about taking further action to calm the markets but at the same time, he's not looking to bailout any European banks.We still prefer to sell dollars against the Japanese Yen than the Euro, but we could still see further gains in the EUR/USD as long as Paulson and Bernanke do not say anything to stifle the rally.Service and manufacturing PMI numbers are due for release tomorrow.Given the drop in industrial production, factory orders and exports, we are anticipating weaker numbers, but whether that impacts the EUR/USD remains to be seen.
BRITISH POUND RALLIES AS BOE FAILS TO COMMIT TO CUTTING RATES
For the fourth trading day in a row, the British pound has strengthened against the US dollar.Since it bottomed out on September 11, 2008, the currency pair has rallied more than 1000 pips.The Bank of England continues to forecast tougher times for the UK and comments from Chancellor Darling suggest that they could deliver more liquidity injections if the financial markets do not stabilize.However despite slower growth, the BoE refuses to commit to cutting interest rates and they probably have become more stubborn with this stance after today's sharp rise in commodity prices.According to BoE Deputy Governor Gieve, the central bank has only one goal, which is to keep inflation stable and because of that, they must stay vigilant on CPI expectations. Their reluctance to cut rates should help extend the rally in the British pound.
JPY:BE CAREFUL OF THE CARRY TRADE RALLY
In Friday's edition of the Daily Currency Focus, we warned traders against reading too much into the carry trade rally.At the time, we cited 3 factors – risk aversion, global easing and high volatility.Although USD/JPY give back all of Friday's gains, the correction in the other Yen crosses were not as severe.This of course is not due to the resilience of carry trades, but instead to the weakness of the US dollar.Therefore we keep our title of the Yen section the same, which is to be careful of the carry trade rally.We believe that of all of the Yen crosses, the one that will suffer the most or rally the least will be USD/JPY because of the damage that the rescue packages does to the US balance sheet.Attracting foreign investment should also become a big problem in the near future as investors start to consider diversifying their investments geographically.Meanwhile there were no surprises from Japanese economic data.Supermarket store sales were weaker than expected as consumer spending slows.
RALLY IN COMMODITY PRICES DRIVE CAD, AUD AND NZD HIGHER
The rally in commodity prices and the weakness of the US dollar drove the Canadian, Australian and New Zealand dollars sharply higher.Economic data was weaker than expected with retail sales in Canada slowing and new motor vehicle sales in Australia slipping.However that did not stop the three commodity currencies from tracking oil and gold prices higher.The high yielders are completely at the whim of the market's risk appetite as well as their tolerance for US Dollars.The Canadian, Australian and New Zealand economies are not out of the woods, but the concerns about the US economy have overshadowed other drivers in the currency market.The rally in oil and gold prices has been sharp and whether they continue will be completely dependent upon the sentiment towards the US dollar because the speed and degree of the move in oil reflects a short squeeze.New Zealand is releasing consumer confidence this evening while Canadian will be releasing consumer prices.Given the drop in the price component of IVEY PMI and the price of raw materials, we expect CPI growth to slow.
EUR/USD:CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURS
The EUR/USD will the currency in play over the next 24 hours because of the Eurozone service and manufacturing PMI reports due for release between 3:30am ET to 4:00am ET, which is 7:30 GMT to 8:00 GMT.On the US front, US Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify before the Senate at 9:30am ET or 13:30 GMT.
After today's sharp rally, the EUR/USD has now entered our “buy zone,” which is established by Bollinger Bands.As long as it does not close below 1.46, the currency pair should rally towards 1.4950, which is the 50-day SMA and the 50% Fibonacci retracement of the July to September sell-off in the EUR/USD.If it does close below 1.46, we could see a move back towards Monday's low 1.4438.
Kathy Lien
http://www.gftforex.com
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