| Daily Forex Fundamentals | Written by Saxo Bank | Oct 01 08 06:52 GMT | | |
| USD may continue to reign supreme for now despite likely very ugly economic data in the pipeline. MAJOR HEADLINES
THEMES TO WATCH - UPCOMING SESSION
Market Comments To get an idea of how little attention the market is paying to economic data these days, we only have to look at the Canadian GDP release from yesterday, which showed a vastly better than expected growth rate of 0.7% vs. 0.2% expected, and yet upon the data's release, USDCAD adjusted a few pips lower before rocketing 200 pips north to close well back into the old range and suggesting that the old bull trend may yet come alive again. The greenback and risk appetite came storming back yesterday as traders apparently decided that it had overreacted to the failure of the TARA bill to pass the first time around and that some form of it would pass later this week. Speculation is making the rounds that the bill will go up for a vote again by Thursday. The clearest evidence of yesterday's sentiment reversal was in the likes of USDJPY - where Monday's 200-pip sell-off yielded to Tuesday's 200-pip rally - and in US Treasuries, where the enormous rally from Monday also fully reversed. The equity market reversal was slightly less enthusiastic, but still erased a considerable portion of Monday's brutal sell-off. With the end of the month/quarter now behind us, this could open up for some upside pressure in risk appetite if the market continues to gain confidence that a bailout package may go through and begin to unclog credit markets (hope is more important than 'actual success' of the package for the short term). End of month/quarter effects may have also had something to do with the virulence of the USD rally yesterday. The USD is moving stronger as the world understands that this credit/banking crisis is going global. Especially hard hit yesterday were European currencies, as it becomes increasingly clear that any policy response in Europe risks being a piecemeal one since the ECB has no authority to make policy beyond liquidity injections. The EUR sell-off accelerated as Ireland dramatically announced that all bank deposits would be insured. This measure is insurance against a flight of capital from Ireland, where banks have been under enormous pressure. Ireland was also one of the first European countries to nosedive into recession due to its housing bubble of epic proportions. This move sets up a dilemma for the ECB and for other EuroZone countries and shows the European weakness in dealing with the crisis with a broad brush as is possible in the US. As well, banks are desperate for USD funding for US liabilities, and with the forward market simply not functioning, some of the demand seems to be spilling over into the spot market. The Irish move is setting off speculation that the UK could follow suit with deposit insurance, and the US Senate is rolling higher deposit insurance levels into the new version of the TARA bailout bill as well. Some of the key risk spreads did actually fall yesterday - for example the 3-month LIBOR vs. US 3-month T-bills spread - but these indicators are still close to record levels and need to come down much further before we can breathe any sigh of relief. Some of the confidence and PMI numbers out of the US have been surprisingly resilient of late, but we still must consider what may be in the pipeline after the shocks of the last couple of weeks. It is truly remarkable that weekly US confidence numbers have not been more negatively impacted by the last couple of weeks of developments. The average consumer will definitely be feeling the heat from this in the coming months. Our studies indicate a near perfect correlation of weekly confidence and gasoline prices over the last few years, but the pocketbook implications of this credit crisis are far larger than a few cents up and down at the gas pump. Perhaps the US consumer doesn't realize this. We also expect yet another ugly unemployment report on Friday - more on that later. Chart: USDJPY A remarkable reversal yesterday in this chart, which also was visible in US Treasuries yesterday. As long as equities remain somewhat on the mend and yields continue higher, the low yielders could remain under pressure and this pair could head higher toward the upper end of the recent range. Support comes in at 105.80 and then 105.40 today. To the upside, there's a bit of descending trendline that must be overcome to set up a more bullish perspective.
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Wednesday, October 1, 2008
Forex Market Update: USD Sweeps Stronger Across The Board As Banking Woes Go Worldwide. Equity And Yield Bounceback Trigger Enormous USDJPY Reversal
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