Daily Forex Trading Outlook

Daily Forex Fundamentals | Written by IntegrityFX | Oct 08 08 22:23 GMT |

A massive global meltdown is in full effect today as stock markets around the world have suffered historical losses in trading or have even completely closed down trading all together. In Asia, shares in Japan fell almost 10%--the worst fall since 1987. In Russia, trading was down 20% at one point. In the UK, they have stepped in to place unprecedented measures to nationalize some financial institutions and still have seen over 5% losses at the lows. The fate of the Euro itself is in jeopardy as the EU fights to agree on solutions and individual members of the union continue to see huge losses. And in the US, investors cling to the hope of a global collaboration for rate cuts, but even the effect of a full point cut may be moot at this point and futures point to another triple point open in the negative.

This worldwide sell-off represents the largest "flight to safety" possibly ever seen. Investors continue to remove any risky assets from their portfolios, as is seen in USDJPY falling below 100 this morning. After being battered for years in Forex as the "carry trade" investors have removed any speculation against the highly undervalued Yen and the currency has seen steep gains against all currencies during this sell off.

Our Forex outlook continues to preach the risk aversion story and with no solution in sight, we continue to use this opportunity to short any risky assets and focus on more USD and JPY strength.

USDJPY - The sentimental 100.00 price was passed and though a break of the number has traditionally been an important indicator, we expect the 100 mark to be somewhat of a long-term pivot over the next few months. Our outlook has been for the USDJPY to range between 90.00-105.00 throughout 2008 and 2009. In the near term, we expect a fall to 96.00 to come quickly. Look to sell rallies.

EURUSD - With uncertainty about the pace of the EU's action or if they will even take action at all, the EURUSD has closed in on a tight range over the past couple of days. The consolidation is expected as the Euro has become highly oversold, but we will look to sell any significant rally or drop as the pair is still fundamentally primed for more losses.
The Fed's Weapon of Choice

Normally, I would talk about my expectations for interest rate decisions, but after today actions by the major central banks, I thought it would be better if I discussed what these cuts will do.

I will be the first to admit that I got it wrong. Looking at all the different ways that the Fed has attempted to increase liquidity in the credit markets, it seemed like the Fed had realized that its usual weapon, rate cuts, was shooting blanks. The target rate had become more of a hindrance to the Fed's actions. But, when they received the ability to pay interest in reserves, putting a floor on the rate, it appeared as if they could focus on the newer weapons in their arsenal. However, as we saw this morning (or last night depending on where you are), this is not the case

Being the insane institution that it is, the Fed has resumed firing blanks at the market, hoping it will be scared to death, or rather life in this case, but there is no actual impact. Although, this time the insanity has spread. Hey, if one blank doesn't work, a bunch of them will have an effect right? This entire move is symbolic, it is an attempt to return confidence into the markets. And the market knows this.

The Fed and government have already done so much in the US, but they haven't given these actions enough time. The problem with the credit markets is not exceedingly high prices for the lenders, i.e. interest rates, it is the unwillingness of lenders to lend. This will only happen with enough time, we have barely seen the effects of the Fed's first rate cuts, not to mention Paulson's $700 billion bazooka, $900 billion worth of TAF lending, or any purchases of commercial paper by the Fed. Yet, officials continue to do more and more to unfreeze the markets. The problem with doing so much so fast is that the tendency is to over react. And when the markets return to normal, they do so too fast, so officials must step in and over compensate again, continuing the vicious cycle.

The bottom line is that if Paulson's bazooka was unable to unfreeze the credit markets, certainly shooting blanks is a pointless endeavor. It looks like what the markets need now is a flame thrower, a flame thrower of confidence.

IntegrityFX

DISCLAIMER:

Leveraged foreign exchange trading carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.