TODAY'S BIGGEST PERCENTAGE MOVERS
- NZD/JPY ( +102 pips or +1.48%)
- CAD/JPY ( +124 pips or +1.27%)
- USD/JPY ( +130 pips or +1.26%)
THE STORIES IN THE CURRENCY MARKET
- USD: FED LEAVES RATES AT 2%, BUT STOCKS SOAR ON HOPE FOR AIG
- EUR: HOW DOES THE VOLATILITY STACK UP HISTORICALLY?
- JPY: YEN CROSSES RECOVER AS DOW SOARS 140 POINTS
- GBP: KEEP AN EYE ON THE BOE MINUTES AND EMPLOYMENT DATA
- CAD: OIL PRICES NEARING A BOTTOM
- AUD: HAWKISH RBA MINUTES FAIL TO HELP THE AUD
- NZD: RALLY IN STOCKS LIFT HIGH YIELDERS
EXPECTATIONS FOR UPCOMING FED MEETINGS
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE
FED LEAVES RATES AT 2%, BUT STOCKS SOAR ON HOPE FOR AIG
The Federal Reserve left interest rates unchanged at 2 percent, which given the market's grossly skewed expectations for a rate cut, should haven bearish for the US stock market and it was, for about 15 minutes. The Fed's decision to hold rates steady sent the Dow Jones Industrial Average to a 2 year low intraday before equities reversed violently higher to end the US trading session up 140 points. Although today's Fed meeting was probably one of the most important in months, speculation about what could happen to AIG has dominated trading. The waiting game is underway and the stakes have increased after the Federal Reserve failed to cut interest rates. This morning, a government bailout seemed out of the question, but as the day unfolded, there was news that the Federal Reserve could be reconsidering its stance on AIG. If this true, it may be the Fed's compromise. In order for today's move to be a bottom for US stocks, AIG needs a bridge loan from the Fed, the private sector or Sovereign Wealth Funds. Hank Greenberg, the former CEO of AIG is already talking about stepping in to help and some people are floating around the idea of conservatorship.
Fed is Holding on to its Ammunition
Going into the meeting, everyone thought that the Fed was backed into a corner and would have no choice but to cut interest rates by 25 and possibly even 50bp. Although the tone of the FOMC statement was relatively cautious, the action or more specifically, the lack of action by the Federal Reserve indicates that they are not willing to bend to the market's pressure. The statement expressed concern about growth, but the outlook for inflation was still uncertain. Therefore one of 2 things probably compelled the Federal Reserve to hold back today - with liquidity injections and 325bp of easing since August 2007, they probably believe that they have done enough. Or they have injected so much liquidity into the financial system today that they want to give the markets an opportunity to respond. If things get worse they can always cut interest rates in October or between monetary policy meetings.
Fed Fund Futures See 60-40 Chance of Rate Cut by Christmas
Fed Fund futures completely miscalculated the central bank's move today, but even so, it does reflect the market's expectations. Yesterday, Fed fund futures was pricing in a 92 percent chance that interest rates would be at 1.75 percent or lower by the end of the year with a 50 percent of rates falling even further to 1.50 percent. These expectations have changed dramatically since today's announcement. The futures contracts are now pricing in approximately a 60 percent chance that we will see a 25bp rate cut by the end of the year.
What Does this Mean for the US Dollar?
For the US dollar, this should be good news because the recent correction was primarily triggered by the readjustment of interest rate expectations. Now that the Fed has failed to deliver, dollar bulls have a reason to jump back into the markets, especially with oil prices at $91 a barrel. We expect the downtrend in the EUR/USD and GBP/USD to resume but USD/JPY should also trickle lower as US equities sell off, but of course that is all contingent upon AIG at this point.
US Economic Data: An Afterthought
The surprises and disappointments of US economic data are nothing more of than an afterthought these days. Consumer prices were weaker than expected while foreign purchases of US securities grew at the slowest pace in 11 months. Looking ahead, housing market data and the second quarter current account balance are due for release on Wednesday.
EURO: HOW DOES THE VOLATLITY STACK UP HISTORICALLY?
Since the beginning of the year, the EUR/USD has had a trading range of 21 big figures or 2100 pips. The high of 1.6038 was set back in July and while the low (so far) of 1.3882 was hit last Friday. With an average annual range of 1900 pips since the Euro's inception, the move may seem unprecedented to many traders. However that is not true, in 2003, the EUR/USD had a 2300 pip range and in 2002, the range was approximately 2200 pips. On a percentage basis, the range that we have seen thus far pales in comparison to the move that we saw in 2003. Nonetheless, EUR/USD 1 month volatilities continue to be at the highest level since 2001. For currency traders, the latest move in the EUR/USD compared to its move historically suggests that 1.3882 is not far from the bottom in the EUR/USD and it should just be a matter of time that the dust settles and the volatility and trading range of the EUR/USD starts to contract. However keep in mind, that this “time” could still be a month away. Meanwhile surprisingly enough, the German ZEW survey of analyst sentiment improved last month while consumer prices dropped by less than expected. The Eurozone trade balance is due for release on Wednesday and the deficit is expected to grow considering the slowdown in German exports.
BRITISH POUND: WATCH OUT FOR BANK OF ENGLAND MINUTES AND EMPLOYMENT DATA
The only country with any consequential economic data on Wednesday is the UK, who is expected to release their employment report and the minutes from the latest Bank of England meeting. Judging from the tone of the letter submitted by BoE Governor King to explain the uptick in inflation to Chancellor Darling, he expects inflation to remain high into the New Year as liquidity injections and interest rate cuts keep monetary policy easy. Going forward, we fully expect the Bank of England to move closer to a rate cut, especially since they cannot afford to let a UK bank fail like the US has after Northern Rock. Their best option at this point is to be proactive rather than reactive which is why they are expected to propose a new emergency financing facility for troubled banks later this week. Consumer prices were slightly softer than expected on an annualized basis, suggesting that inflation may have peaked. Looking ahead, we expect the employment report to be weak as the job cuts in the financial sector hit the UK labor market.
JAPANESE YEN CROSSES RECOVER AS DOW SOARS 140 POINTS
Thanks to the recovery in US stocks, the Japanese Yen crosses were the day's largest percentage movers and the day's best performers. As we mentioned in the US dollar portion of our report, news about AIG holds the fate of the Yen crosses. The Federal Reserve's decision to keep interest rates unchanged should be positive for USD/JPY from the perspective of interest rate differentials, but the equity markets has a bigger pull on the currency market these days than rate differentials. Therefore if AIG is rescued, a rally in the Dow could trigger a recovery in USD/JPY, even though we are bearish the currency pair from a longer term perspective. We will only turn bullish USD/JPY when the markets have stabilized, banks are willing to extend credit, and default risk is no longer an issue. Unfortunately if legendary bond fund manager Bill Gross of PIMCO is right in expecting a financial tsunami, then we have yet to see a bottom in USD/JPY.
CANADIAN, AUSTRALIAN, NEW ZEALAND DOLLARS CONSOLIDATE
The Canadian and New Zealand dollars recovered against the greenback as commodity prices consolidate. Oil prices hit an intraday low of $91 a barrel before settling at $93. With crude prices having fallen close to 40 percent since July, it may time for a recovery since supply and demand for oil has not changed. Part of the reason why the Canadian dollar has fared better than its US counterpart is the encouraging comments from Canadian officials. They believe that the Canadian markets are in much better shape than the US and for that reason Canada will not suffer the same fate. Interestingly enough, the Australian dollar did not track the other currencies higher despite more hawkish RBA minutes. Central bank Governor Stevens will be speaking in Sydney this evening.
GBP/USD: CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURS
The country with the most market moving economic data on the calendar Wednesday is the UK. The Bank of England minutes and the UK employment numbers are due for release at 4:30am ET or 8:30 GMT. The dollar will also be a big focus with the market looking for a possible announcement from AIG.
The makes the GBP/USD the currency pair in play. Yesterday's levels still hold. We want to point out the continued failure at the Fib level. The GBP/USD has broken out of our sell zone and is currently in range trading mode. The levels to watch are 1.8131 on the upside and 1.7645 on the downside. If the currency pair closes at or above that level, it would have broken the 20-day SMA and the 23.6% Fibonacci retracement of the July to September sell-off, which would open the door for a move towards 1.85. If it breaks below 1.7645 on the other hand, the GBP/USD would fall back into our sell zone, triggering a possible move below 1.75.
Kathy Lien
http://www.gftforex.com
DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.
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