European Financials Weaken Providing for Dollar Strength

The Usd gained strength across the G10 on European bank woes and concerns about the slowing global economy. The EurUsd dropped nearly 300 pips to its lowest levels since Q4 07, the pair traded down to the high range of 1.34. The carry trade continues to unwind as funding for banks continue to battle adversity, the UsdJpy broker previous support trading with a 101 handle. The GbpUsd collapsed to the high range of 1.76, losing over 300 pips in early trading. Equity markets weakened substantially with the Dow down 400pts pushing the index below 10,000. Bonds yields continue to tighten, with the 2yr in 14bps, the latter part of curve followed suit. Commodities also experienced a major price correction with oil trading below $90, while gold spiked up in intraday trading to the $860 level.

Turmoil continues in the global markets with the European banking sector facing the effects of the credit crisis. German officials rescued Hypo Real Estate, one of the country's largest lenders. Dutch firm Fortis was forced into the arms of BNP Paribas, as they were also on the brink of failure and the govt. coordinated bailout fell through. This is further testament to the serious condition of financials and the concerns regarding the economic condition are worsening. BoE member Darling spoke this weekend stating that they are prepared to do what is necessary to help stabilize the markets. Traders are already pricing in a 50bps cut to rates, hence why we are seeing cable weakness. Our trading range for the sterling is 1.75-1.71 with a bias to the downside.

The US financial markets are struggling, despite the Fed bailout plan, as the effects from this will take time. Economic conditions are projected to worsen as growth slows and unemployment rises. The Fed will most likely cut rates as a last resort in combating the recession. The dollar has appreciated against most of the G10, with the exception of the Yen. We are looking for the EurUsd to weaken towards levels of 1.33 within the next month.

AC Markets
http://www.ac-markets.com

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