The U.S. Dollar Moving to the Line of Least Resistance
After intense negotiations, Democrats and Republicans found an agreement over the U.S. government rescue proposal. Nonetheless, the financial markets are very prudent, as the plan must be voted by the House the Representatives and the Senate. The U.S. dollar, in the mean time, continues to consolidate in thigh range.
Government interventions almost completed
As the tail (is it the tail?) of the financial crises is expanding deeply into the banking sector, the Federal Reserve and the Treasury department are making an enormous effort to get things going again. With the objective to decrease risks and to secure a smooth transition, the U.S. government announced that Goldman Sachs and Morgan Stanley would become deposit taking banking institutions. So, the only two remaining investment banks are becoming bank holding companies making and end of the private investment bank in the United States. In addition, the Bush's proposal for a USD 700 billion rescue plane is about to become a reality, upon congressional approval, after two days of negotiations between the Congress and the U.S. Government. The TARP (Trouble Asset Relief Program) deal is a systematic approach whose main goal is to provide liquidity to troubled lenders and to give some confidence to domestic and foreign investors. Especially, after Washington Mutual was considered unsound by the Office of Thrift Supervision, as panic withdrawals took place. The largest banking failure in the history of the United States, right after Lehman Brothers default, will surely leave some scars behind. JP Morgan will acquire its loan portfolio and banking operations for USD 1.9 billion. Nonetheless, uncertainty might depress the international demand for U.S. assets and weigh on the U.S. dollar over the long term.
The U.S. economy is still in trouble
In a recent testimony in front of the Joint Economic Committee of Congress, Fed's Chairman Ben Bernanke designed a cloudy picture for the U.S. economy and urged bold solutions to avoid much worst consequences. Nevertheless, he anticipated that the economic growth would accelerate in 2009. Was he overly optimistic considering that the huge reshuffling of the financial sector is still in course? In reality, the U.S. economy is experiencing an increase of inventory that could lead to both production and job cuts. Currently, the final estimate for the second quarter Gross Domestic Product (GDP) stays strong, although lower than previous estimates. In fact, the decline of both consumer spending (from 1.7% to 1.2%) and net exports (from 3.1% to 2.9%) led to a revision of the second quarter Gross Domestic Product (GDP) to 2.8% from 3.3%. However, numbers must be checked again, once money from the tax rebates will no longer arrive in the mail. Recent data confirmed that the slowdown of the economic process is in place. In August, new orders for durable goods fell 4.5% (-1.6% expected) month-on-month from July's decline of 0.8%. The fall was broad based and should anticipate further weakness ahead. Considering that the housing market has not found a bottom yet. New home sales, as an example, slumped almost 12% month on month in August, while the month's supply at a current sales pace rose to 10.9 months from 10.3 months. Existing home sales slid instead 2.2% (-1.3% expected) month on month, but the monthly sales pace moved down to 10.4 months from 10.9 months.
ECB's rate cut missing
With an eye across the Atlantic and another in Brussels, Europeans are observing the development of the banking crisis with the hope it will only mildly touch the Old continent. In reality, the economic slowdown has already hit the European mainland and it is expanding into most of the economic sectors. Unemployment is on the rise, while consumes are at best stagnating. The European Central Bank (ECB) stays focused on inflation for now, but rates could be lowered if the economic contraction will persist. In September, the Euro zone's Purchasing Managers Index (PMI) for the manufacturing sector fell to 45.3 (47 expected) from 47.6. The PMI for the service sector declined instead to 48.2 (48 expected), an all time low, from 48.5. Germany has been baldy touched by the world's contraction. The PMI manufacturing fell to 48.1 from 49.7 and the service sector to 49.3 from 51.4. At the same time, the German IFO business survey slumped to the lowest level of the past three years to 92.9 (94.0 expected) in September from 94.8 in August.
German businesses are dissatisfied with their actual setup. The current business situation deteriorated to 99.8 from 103.2. In reality, nobody is immune to the economic slowdown. In France, business confidence fell to the lowest level of the past five years, while consumer spending declined 0.3% in August after increasing 0.4% in July. In Italy, business confidence slid to 82.7 in September form 83.3 in August. Growth prospective remains near 0, as the new government led by Mr. Berlusconi was not able to confirm the many promises made before the elections. Taxes, now at about 45% of the income, were supposed to decline. However, the Ministry of Finance made it recently clear that taxes will remain unchanged for a few more years. In August, consumer confidence rose to 102.8 (99 expected) from 99.6, but the survey was done before the actual financial turmoil became public.
EURO/USD: tight consolidation continues
EUR/USD is testing the important support line at 1.4300. A move below this level would target 1.424, 1.4150. A breakout failure could instead take the price to 1.4860 eventually 1.5020.
GBP/USD is moving to 1.7920. This level should hold. However, a decline below 1.7740 would target 1.75. A breakout failure would take the price to 1.86, eventually 1.89.
USD/JPY is targeting the important resistance line at 107.00/107.50. A move above this level would lift the price to 107.90. 108.40. A breakout failure would increase selling pressure and let the price to slip to 104.50, 104.00.
USD/CAD is testing the important resistance at 1.0450. A move above 1.0490 would target 1.0520, eventually 1.0590. A breakout failure would take the price back to 1.0300, possibly 1.0200, if 1.0250 is broken.
Angelo Airaghi
MG Financial Group
http://www.mgforex.com
Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.
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