Daily Report: Dollar Higher as Bailout Plan Finalized, European Banks Failure Boost Yen

Market Overview | Written by ActionForex.com | Sep 29 08 07:44 GMT |


Dollar gapped higher as the week opens on the news that President Bush and Congressional leaders agreed on the $700 bailout plan finally. The plan, Emergency Economic Stabilization Act of 2008, is expected to pass House today and Senate by Oct 1. The announcement eased the fears that further financial markets disruption in the US would be seen, at least in near term. Dollar extends rebound broadly except versus the yen. Dollar index soared to a high as 77.95 level and the breaking of 77.64 resistance adds more weight to the case that correction from 80.38 has completed with three waves down to 75.89 and was supported by a 50 % retracement level. More upside should be seen in near term with the prospect of retesting 80.38 high.

Dollar Index 4 Hours Chart - Forex Chart, Forex Rates, Forex Directory, Forex Portal

Outlook in EUR/USD and GBP/USD is similar. As we pointed out before, the corrective rebound since early Sept in both pairs have already met their target and today's sharp decline is affirming the case that correction in these two pairs have completed. Focus is now turning to 1.4150 and 1.7916 support for confirmation.

The greenback is also additionally supported by fear of spreading of bank failures to Europe. Fortis, the largest Belgian bank, received 11.2b euro rescue from governments of Belgium, Netherlands and Luxembourg after takeover plans with BNP Paribas, ABN Amro and ING failed. Bradford & Bingley, the UK's largest mortgage lenders, become the second UK bank after Northern Rock to be nationalized and was seized by the government after credit crisis shut off funding and clients struggling to repay mortgage. Asian and European stock markets are dragged down by the news and in turn gives a boost to the yen.

On the economic data front, New Zealand Trade deficit came in narrower than expected at -750m in Aug. Japan retail sales rose more than expected by 0.7% yoy in Aug. Eurozone sentiments indicators will be released in the European session. In the US session, main focus is on Aug personal spending and income report.
SUMMARY OF THE "EMERGENCY ECONOMIC STABILIZATION ACT OF 2008"

I. Stabilizing the Economy

The Emergency Economic Stabilization Act of 2008 (EESA) provides up to $700 billion to the Secretary of the Treasury to buy mortgages and other assets that are clogging the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. EESA also establishes a program that would allow companies to insure their troubled assets.


II. Homeownership Preservation

EESA requires the Treasury to modify troubled loans - many the result of predatory lending practices - wherever possible to help American families keep their homes. It also directs other federal agencies to modify loans that they own or control. Finally, it improves the HOPE for Homeowners program by expanding eligibility and increasing the tools available to the Department of Housing and Urban Development to help more families keep their homes.

III. Taxpayer Protection

Taxpayers should not be expected to pay for Wall Street's mistakes. The legislation requires companies that sell some of their bad assets to the government to provide warrants so that taxpayers will benefit from any future growth these companies may experience as a result of participation in this program. The legislation also requires the President to submit legislation that would cover any losses to taxpayers resulting from this program from financial institutions.

IV. No Windfalls for Executives

Executives who made bad decisions should not be allowed to dump their bad assets on the government, and then walk away with millions of dollars in bonuses. In order to participate in this program, companies will lose certain tax benefits and, in some cases, must limit executive pay. In addition, the bill limits "golden parachutes" and requires that unearned bonuses be returned.

V. Strong Oversight

Rather than giving the Treasury all the funds at once, the legislation gives the Treasury $250 billion immediately, then requires the President to certify that additional funds are needed ($100 billion, then $350 billion subject to Congressional disapproval). The Treasury must report on the use of the funds and the progress in addressing the crisis. EESA also establishes an Oversight Board so that the Treasury cannot act in an arbitrary manner. It also establishes a special inspector general to protect against waste, fraud and abuse

Full 110 pages document
GBP/USD Daily Outlook

Daily Pivots: (S1) 1.8362; (P) 1.8415; (R1) 1.8496; More

Cable's fall from 1.8668 extended further to as low as 1.8055 today as expected. As discussed before, rebound from 1.7445 has likely completed at 1.8668 and today's decisive break of 4 hours 55 EMA adds much credence to this case. At this point, intraday bias remains on the downside as long as 1.8295 minor resistance holds. Further break of 1.7916 support will confirm this case and bring retest of 1.7445 low and long term fibonacci level of 50% retracement of 1.3680 to 2.1161 at 1.7421. on the upside, above 1.8295 will turn intraday outlook neutral first but another fall is still in favor after recovery.

In the bigger picture, as mentioned before, the rebound from 1.7445, which is treated as correction to down trend from 2.1161 only, could have completed after meeting target of 1.8512/8794 resistance zone and was limited below key near term resistance of 1.8794 (50% retracement of 2.0158 to 1.7445 at 1.8802). Medium term outlook remains unchanged. Fall from 2.1161 (07 high) is expected to developing into a five wave decline before making a medium term bottom. sustained break of 1.7421/45 support zone will confirm that this fall has resumed for next target of 61.8% retracement of 1.3680 to 2.1161 at 1.6538 first. Break of 1.9337 support turned resistance is needed to invalidate this view.

GBP/USD 4 Hours Chart - Forex Chart, Forex Rates, Forex Directory, Forex Portal
Economic Indicators Update

GMT  Ccy  Events  Actual  Consensus  Previous  Revised
21:45  NZD  New Zealand Trade balance (nzd) Aug  -750M  -912.0M  -781.0M  -808.1M
21:45  NZD  New Zealand Imports Aug  4.32B  4.15B  4.20B  4.23B
21:45  NZD  New Zealand Exports Aug  3.57B  3.24B  3.42B  
23:50  JPY  Japan Retail sales Y/Y Aug  0.70%  0.20%  1.90%  2.00%
9:00  EUR  Eurozone Business climate Sep   -0.50%  -0.33%  
9:00  EUR  Eurozone Economic sentiment Sep   87.3  88.8  
9:00  EUR  Eurozone Consumer Confidence   -19  -19  
12:30  USD  U.S. PCE core M/M Aug   0.20%  0.20%  
12:30  USD  U.S. PCE core Y/Y Aug   2.40%  2.40%  
12:30  USD  U.S. PCE index M/M Aug   N/A  0.60%  
12:30  USD  U.S. PCE index Y/Y Aug   N/A  4.50%  
12:30  USD  U.S. Personal spending Aug   0.20%  0.20%  
12:30  USD  U.S. Personal income Aug   0.20%  -0.70%