Euro Tries To Recover After RBA Rate Cut Signals CBs Ready To Ease

Top Stories

• RBA cuts rates by 100bp vs. 50bp expectedspurs equity rally
• Fed may backstop commercial paper in US
• Iceland guarantees deposits, suspends stock trading in its banks
• French propose emergency G-8 meeting but Reuters reports that they do not support rescue fund
• TED spread hits all time high at 383bp
• Asian equities recover after RBA surprise cut, European stocks firmer but offinitial highs
• Oil rebounds slightly to $90/bbl
• Gold moves further towards $900 at$872/ozlast

Overnight Eco

• AUD RBA takes rates to 6.00% from 7.00% markets eye coordinated easing
• JPY BOJ remains at 50bp open to coordinated action
• GBP IP at -0.6% MP at -0.4% vs. -0.2% expected
• EUR Industrial Orders at 3.6% vs. 0.2% prior revised upward as well

Event Risk on Tap

• USD Fedspeak – Stern, Bernanke
• USD Consumer Credit 5.6B forecast

Price Action

• USD/JPY skyrockets to 103.00 asrisk aversion eases after RBA cut
• AUD/USD shoots up to 7350 from 7000 low despite cut in rates as risk flows dominate
• GBP/USD holds 7400-7500 range but risk liquidation remains
• EUR/USD bounces to 3600 on short covering after RBA news but markets remains wary Industrial Orders help

Euro Tries To Recover After RBA Rate Cut Signals CBs Ready To Ease

In a move that shocked the currency markets, the Reserve Bank of Australia lowered its benchmark interest rate by full 100bp from 7% to 6% fueling speculation that other G-11 Central Banks will follow suit and ease aggressively in the next several days.The RBA was expected to lower rates only 50bp but it s dramatic policy change highlights the seriousness of the current global credit crisis as monetary authorities across the world have abandoned all pretense of fighting inflation focusing solely on providing liquidity and easing the availability of credit.

The EURUSD rallied all the way to the 1.3600 handle on expectations that a coordinated set of interest rate cuts amongst the G-11 central banks would provide some relief to the highly stressed global capital markets. However the rally was decidedly limited in scope as most market remained wary of the situation in Euroland with EZofficials unable to come up with a unified plan to combat the current crisis.

Euro'e weakness over the past two weeks has underscored the difficulty of managing a currency with a unified monetary policy but fractured fiscal control. Specifically, the unilateral move by Ireland to protect its depositors assets, forced Germany to do the same and created a beggar thy neighbor dynamic that does not bode well for the region's ability to cope with this crisis. Nevertheless, if equity markets in North American stage a rally today, the EUR/USD which has been pounded mercilessly over the past week is very likely to benefit see a short covering bounce as risk aversion flows ease. If on the other hand the DJIA continues to plumb the sub-10000 level euro gains in Asia and early Europe are very likely to be reversed.

Meanwhile, the trade in cable was significantly more violentafter BBC business editor Robert Peston's blog article headlined 'Banks Ask Chancellor for Capital' raised fresh doubt about the viability of the UK banking system. Mr. Peston noted that RBS, Barclay and Llyods all signaled to the UK Treasury their desire for a comprehensive government rescue package. Although none of the banks have any immediate need for fresh capital, they fear that investors lack of confidencecould further damage their balance sheets if their stocks come under another wave of selling. The pound tumbled nearly 150 points as a result but managed to stabilize at 1.7400 after the market digested the news.

Despite the overnight bounce trading in the currency market remains precarious as the central theme of risk or no risk dominates flows. If US equities prove unsupportive both euro and pound could see fresh yearly lows before the end of the day.

FX Upcoming

Boris Schlossberg
http://www.gftforex.com

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