Weak Reactions After Interest Rate Decisions

Overall, the market extended the gains of the low yielding currencies made during the last few days, as the market is now driven by risk aversion. The overnight session was devoid of any major movements, despite two important interest rate decisions from Australia and Japan. Ahead, the U.S. calendar is very light.

The Euro (Eur/Usd) is testing the first support area (1.2560) and at the same time, the low of Monday's trade. The pair posted a small gain during the Asian session, but gave up most of the pips gained soon after the London open. If the pair does manage to break below 1.2560, the next support areas are 1.2500 and 1.2400.

The Euro-area PPI shows that the pace of inflation is starting to slow at a strong pace. The released number of -0.8% was much larger than analyst forecasts. The number released for the month of September was revised lower, to -0.3%.

The Pound (Gbp/Usd) is currently testing the 1.4800, the same level where the pair bottomed one day earlier, after plunging 500 pips. During the overnight session, the pound had very little momentum, despite the large trading range. If the pair does manage to break lower, it will be heading for a new low for the current year, which is a distinct possibility as the BoE is expected to cut 100 basis points later this week.

The construction PMI plunged in November to a new record low, of 31.8 compared with analyst expectations of 33.8. The released number denotes the very weak period the U.K. housing and construction market is enduring, showing the sector contracted for the ninth consecutive month

The Aussie (Aud/Usd) traded flat during the overnight session, not managing to make any significant movements, despite the bigger than expected interest rate cut from the RBA. The pairs trading range reached almost 80 pips, after the pair broke below Monday's low at the outset of the Asian trading session, but has since rebounded.

The 100-basis point reduction was slightly above consensus, although matched several forecasts. There have been four cuts since September 2nd, totaling 300 basis points. The new 4.25% level matches the last cyclical low from Dec 2001 to May 2002 and is 50 basis points lower than the prior two cyclical lows of 4.75% from July 1993 to August 1994 and again from December 1998 to November 1999. The statement ends with the same sentence as the statement released on November 4th, suggesting that more easing will be undertaken in the future.

The Cad (Usd/Cad) struggled, once again, during the overnight session to break above the same resistance area at 1.2470, but lacked the momentum to do so. The pair has tried twice, since the start of the new trading day, but both times the move was rejected. On the downside, the neutral pivot point (1.2430) held as support overnight.

The Swissy (Usd/Chf) traded in a very tight range during the Asian session, but managed to break a little higher after the London open. Currently, the pair is struggling to break above the neutral pivot point (1.2070), 30 pips higher than where the U.S. session closed.

In November, the Swiss CPI read shows that the pace of inflation is slowing from the high reached in July of 3.1%. The released number of -0.7% is smaller than market expectation of -0.3%. The year-over-year read fell to 1.5%

The Yen (Usd/Yen) rose in the early Asian session near the neutral pivot point (93.80), but soon started to move lower. The downside moves intensified after the BoJ made its monetary policy statement, but still the reaction was on the weak side. Up to now, the yen has fallen 20 pips since the start of the new trading day.

In an emergency meeting held by the Bank of Japan tonight, the policy board decided unanimously to keep the Overnight Call Rate at 0.30%. This comes after the BoJ had cut the interest rate from 0.50% to 0.30% some time earlier. With the lowest rate amid industrialized countries, economists argued that the low interest rate will not provide strong enough relief to the Japanese economy, and that the central bank has mostly depleted its powers to influence the business cycle by using monetary policy.

Markets Catching Up With Reality

Current Futures: Dow +97.00, S&P +14.50, NASDAQ +11.00

European Trade: Last week the equity markets posted record gains, now the major indexes are “catching up” with reality, and are, once again, pricing in a prolonged slowdown, led by weak consumption.

The declines are led by financial institutions and commodity stocks, as the raw material market plunges. In tonight's sessions, the Nikkei fell 533.53 points (6.35%) to 7,863.69, while the Australian S&P/Asx slipped 153.00 points (4.16%) to 3,528.20. In Europe, the German Dax fell 40.62 points (0.92%) while the U.K. Ftse declined 50.37 points (1.24%). Both the Asian and the European markets have declined, on average, 50% from the beginning of the year.

Today, the U.S. car manufacturers take the next step in their fight to avoid bankruptcy. Soon, hearings for the $25-billion rescue package will start, and the three car manufacturers must convince Congress on the necessity for the money, and on their capacity to repay the loan. These hearings are an extension of the hearings held in November, when the top executives from the three manufacturers failed to come up with any serious plan to cut spending and increase profitability. Both GM and Ford are planning to sell some of their in-house brands, but the big question is ‘who is going to buy them in the current conditions, when it is almost impossible to access a credit line?' In the business environment, the three car manufacturers are notorious for their inability to develop a long-term plan.

Crude oil made a new low during the European session, after OPEC failed to cut production. Crude oil for December delivery slipped $1.10 to $47.50.

Gold extended the declines seen one day earlier. Bullion for immediate delivery fell $9.20 to $764.50.

Previous Asian trade: The equity markets saw some strong declines in the last trading sessions, as it seems the world's recession will last much longer than expected.

On Monday, another set of data hit the wires, re-confirming the poor state of the developed economies. In Europe, the manufacturing PMI fell to the lowest level on record, showing that the sector is contracting at a very high speed. The same could be seen in the U.K. report, which showed the manufacturing sector contracted at the highest rate since 1992, when the index was first started. The same report for the U.S. manufacturing industry which fell to the worst read since 1981 recession, while the inflation gauge fell to the lowest level in the last six decades, 25.5. In June this year, the inflation gauge topped at 91.5, the highest read on record

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