Dollar Gains On Euro But Lower Against Yen After Senate Passes Rescue Package

Top Stories

• Senate approves the bailout bill 74-25. Action moves back to the House
• Asian markets move lower but European equities rebound slightly in wake of bailout passage
• Europeans see little agreement on $300 Billion rescue package proposal by France's Sarkozy
• ECB decision on tap but few expect a surprise rate cut
• China Manufacturing PMI at 44 – lowest reading ever
• Oil back below $100/bbl at $97/bbl as global slowdown fears grow
• Gold off $16 at $871 on possible relief of stress in credit markets

Overnight Eco

• AUD 1364M vs. -717M month prior
• NZD Commodity Prices -4.9% vs.-3,3% month earlier
• GBP Nationwide House Prices -1.7% vs. -1.5% called
• GBP Construction PMI 38.8 vs. 39.0 forecast
• EUR PPI -0.5% as forecast

Event Risk on Tap

• EUR ECB rate decision small chance of 25bp cut
• USD jobless claims could approach 500K
• USD Factory Orders market looks at -1.8 contraction
• USD Auto Sales expected to print at lowest level in 15 years at 13.6M

Price Action

• USD/JPY sold hard into 105.30 as carry dumped and fiscal implications of $700B package start to weigh
• AUD/USD sold into 7800 on carry flows but bounces back a bit
• GBP/USD scraping bottom near new lows of 7600 as financial concerns weigh
• EUR/USD: drops through 3900 on thin liquidity as traders fear a lack of coordinated European response

Dollar Gains on Euro but Lower Against Yen After Senate Passes Rescue Package

Last night the US Senate passed the $700 Billion rescue package by 74-25 vote adding more than $100 Billion of additional tax cuts to businesses and individuals and temporarily increasing FDIC insurance from 100K to 250K. The bill will now go back to the House where it appears to have a strong chance of passing in its present form. The market reaction in the meantime was relatively muted as Asian equity bourses declined but UK and European stock markets were mildly higher by midday morning session.

In the currency market the euro continued its slide against the greenback dropping all the way through the 1.3900 figure in what many described as thin nervous trading. The fear amongst many FX traders is that EZ lack the institutional structure to deal with the wide spread credit crisis that has gripped its banking system and may therefore provide no effective policy response to the deteriorating credit conditions on the continent. There was even some speculation that the ECB may be forced to enact an emergency rate cut at today's monthly meeting, although given the still very hawkish outlook of ECB policy officials we doubt that Mr. Trichet would surprise the markets. Should he do so however, the already negative sentiment towards the euro could turn for the worse the pair could easily break it long term support at 1.3860 and possibly head for a test of 1.3500 level especially if the 'mini G-8' meeting called for by French President Nicolas Sarkozy to deal with the crisis produces no agreement over the weekend highlighting the disarray in EZ fiscal policy.

Meanwhile the only currency that performed well against the buck was the yen, as traders considered the balance sheet implications of the $700 Billion rescue plan. Yesterday US Government debt officially breached the $10 Trillion barrier and today's legislative action will only add fuel to the fire exacerbating the financing demands of an already fragile system. Given the rapid deceleration in US economic activity, we expect US government and current account deficits to skyrocket next year. Historically during times of global economic slowdowns currencies of nations with massive current account surpluses tend to perform better against currencies of nations with large CA deficits. Therefore we believe that the long term consequences of today's legislative action by the Senate will continue to favor our 100 USDJPY scenario despite any relief rallies in equities and carry along the way.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 8:30 12:30 USD Initial Jobless Claims (SEP 27) - 493K
USD 10:00 14:00 USD Factory Orders (AUG) -1.8% 1.3%

Boris Schlossberg
http://www.gftforex.com

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