Financials Weaken in Europe Building Additional Dollar Strength

The Usd carried yesterday's gains in the early US session as overall market volatility spiked following the failure of the Fed bailout proposal. The EurUsd declined over 200 pips to the low 1.42 level, while the UsdJpy rose 130 pips to the mid range of 105. The GbpUsd slid an additional 80 pips following yesterday's losses, finding support at the 1.80 price area. Equity markets began to recover following the largest one day drop in history with the Dow falling 777pts. Today the Dow is up a little over 200pts, while the FTSE, CAC, and DAX are marginally positive. Commodities are mixed with oil up 2% at 98, while gold slid 3% to 882 following the rally in the previous trading session. Bond yields are beginning to widen, but the 2yr remains below 2% which is extremely tight and represents the heavy buying of more secure assets.

Eurozone inflation fell from 3.8% to 3.6% exp. giving the ECB more room to ease rates by Q109. This is a major driver in the Eurodollar selling, as easing energy prices are likely to keep inflation constrained. Outside of the weaker inflation story, the bank bailouts have hit Europe as well, with the governments of Belgium and France extending $9.2bln to a troubled bank, while the Irish Govt. stated that they would guarantee all deposits and debts of Irish banks. News out of the UK was light, but the cable continues to weaken, as the weak housing data released yesterday suggest further pain has yet to be realized in the current price. We remain bearish on the sterling with a trading range between 1.81-1.77, out bias is to the downside based on UK economic conditions.

US financial markets reached exceptionally high levels of volatility with the VIX well above $40 yesterday. The equity markets tanked, and bond prices soared, while FX seemed to have taken its own direction focusing more on the global economic outlook and the full scope of activity in interest rate and capital markets. We project dollar strength to pickup in the long-term but the near-term outlook should be turbulent with a trading range between 1.39-1.43 with a bias to the downside.

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

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