Euro Open: Lehman Implodes, US Dollar Sinks Against Major Currencies

The Euro exploded upward overnight, reaching as high as 1.4479. Sterling followed suit, rushing higher to surpass the 1.81 mark before settling in the mid 1.80s. The economic calendar will fall by the wayside in European hours as forex traders brace for impact after Lehman Brothers failed to secure a buyout and declared bankruptcy.

Key Overnight Developments

• Buyers abandon Lehman Brothers buyout, bank declares bankruptcy
• Bank of America buys Merrill Lynch for 44 billion dollars
• Top banks create liquidity pool to avoid further meltdown, Fed extends lending
• Crude oil falls below $100/barrel

Critical Levels

The Euro exploded upward overnight, reaching as high as 1.4479. Support lies at 1.4116, with near-term resistance at the psychologically significant 1.4500 level. Sterling followed suit, rushing higher to surpass the 1.81 mark before settling in the mid 1.80s. Support is seen at 1.7734, while resistance is at 1.8194

Asia Session Highlights

The data docket was decidedly uneventful. New Zealand's Manufacturing Activity slumped sharply in the second quarter, falling -0.6% versus a revised 3.0% in the three months to April. The down tick owed to sharp declines in meat and dairy sales, which together declined -8.9%. The Performance of Serves Index continued its decline, printing deeper into contractionary territory at 47.9 in August versus 48.9 in July. In sum, the releases offered little new information, with the market already pricing in substantial interest rate cuts from the RBNZ to boost the smaller antipodean economy as it slides into recession.

In Australia, Dwelling Starts shrank -3.7% in the second quarter from a revised -1.0% in the three months to April.

The real news overnight came from the US as authorities failed to line up buyers for troubled investment bank Lehman Brothers. Key investors Bank of America and Barclays Plc pulled out of negotiations after Barclays could not secure government protection from loses on Lehman's assets. The International Swaps and Derivatives Association held a special trading session today allowing its member banks (218 in total) to begin squaring their Lehman-linked exposure in an effort to prepare for Lehman's eventual move into bankruptcy.

Within hours of backing out of the Lehman deal, Bank of America was revealed to have entered into an agreement to buy another major bank, Merrill Lynch. Meanwhile, the US Federal Reserve boosted its lending facilities and a consortium of 10 major banks created an emergency liquidity pool of $70 billion dollars to avoid further meltdown. The group is reported to include Bank of America, Deutsche Bank, Credit Suisse, UBS, Citibank, JPMorgan, Morgan Stanley, Goldman Sachs and Barclays. The Fed issued a statement saying, 'The steps we are announcing today, along with significant commitments from the private sector, are intended to mitigate the potential risks and disruptions to markets…in the wake of an unwinding of a major financial institution.'

Euro Session: What to Expect

France's Current Account deficit may see a bit of improvement in July after it was revealed last week that the Trade Balance portion of the reading saw a shortfall of -4.8 billion euro versus -5.0 billion expected and -5.4 billion in the preceding month. The result owed to lower import volumes as French consumers cut back on spending amid slowing economic growth both domestically and across the European Union. The improvement could be short-lived however, as exports will likely decline as well in the coming months. France relies on other EU countries to absorb most of its outbound shipments, and slowing consumer spending in countries like Germany and Italy will certainly see shrinking demand for French export goods.

Swiss Retail Sales are expected to rebound to 2.3% in July from 0.7% in June. The large month-to-month disparity is likely accounted for by a wild uptick of over 7% in April when Switzerland co-hosted the European Cup championship. Sales are generally expected to slow into the second half of the year as the global economic slowdown arrives in Switzerland and begins to take its toll on consumer demand. Indeed, Consumer Confidence printed at the lowest in over 4 years in July. Producer and Import Prices are expected to see the annualized growth rate slow to 4.6% in August from 4.9% in the preceding month in line with the selloff in crude oil and other commodities.

On balance, price action is likely to remain focused on news coming out of the US as the financial markets brace for Lehman Brothers to declare bankruptcy. With Hong Kong and Tokyo markets closed today, forex traders may have only seen the tip of the iceberg in terms of volatility until London comes on line.

DailyFX

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