Dollar Down as Risk Revives - Sayonara USD/JPY?

Daily Forex Fundamentals | Written by GFT | Dec 08 08 13:51 GMT |

Top Stories Global equities stage a massive rally after positive close in US Friday Risk currencies rally in tandem with stocks US lawmakers likely to approve small auto bailout of $15B Obama plans biggest infrastructure investment since 1950's China warns Sarkozy over Dalai Lama meeting Riots in Greece continue after police kill a teenager Oil rebounds to $43/bbl Gold at $775/oz. off lows at $758/oz. Overnight Eco JPY Bank Lending 3.2% vs. 2.2% called as companies turn to loan financing JPY Current Accountworse at 1.11T vs. 1.16T eyed JPY M2 Money Stock 1.7% vs. 1.8% JPY Economy Watchers Sentiment ticks up from lows 21 vs. 20 called EUR Sentix Investor Confidence worse at 42.3 vs. 40.0 eyed GBP PPI weaker at -0.7% vs. -0.6% forecast Event Risk on Tap EUR German Industrial Production expected at -1.5% CAD Housing Starts expected at 199K Price Action USD/JPY finally clears 9300 as risk appetite returns AUD/USD runs to withina few ticks of 6700 as risk assumption reigns GBP/USD equity flows help lift cable to 1.5000 for first time in more than a week EUR/USD runs to 1.2900 on risk strength Dollar Down as Risk Revives - Sayonara USD/JPY? Global equities staged a massive rally on the first day of trading of the week with Nikkei rising 5% while the Footsie and DAX both registered similar gains on the European open.The sudden burst to the upside was driven by the strong turn around in US equities on Friday which swung nearly 6% to the good despite the horrid NFP numbers. This latest swell of investor enthusiasm was fueled by speculation of further fiscal stimulus from US and European authorities as well the possible near term resolution of the US auto crisis with the Big Three likely to obtain bridge loan financing of $15 Billion to help tide them over until President elect Barak Obama assumes office. In reality, with stocks grossly oversold, today's price action appears to be nothing more than a vicious short covering rallywith risk currencies participating in tow. We noted last week that 1.2500 for EUR/USD and 1.4500 for GBP/USD were strong support and that indeed appears to have been the case.Both high yielders bounced today taking out 1.2900 and 1.5000 respectively. The one pair that has been a noticeable laggard in the carry rebound is USD/JPY only managed to climb higher by 40 points while euro and cable registered triple digit gains.The primary reason of course is the rapid compression in interest rate differentials which has rendered the carry trade in USD/JPY nearly obsolete.As our colleague Kathy Lien noted in Friday, "Fed fund futures are already pricing in a greater chance that the central bank will cut rates by 75bp on December 16th than 50bp. That would bring US interests down to 0.25% and turn the US dollar into the lowest yielding currency in the developed world."At that point the knee jerk correlation between equities and USD/JPY is likely to weaken even further. In the meantime if US equities reverse theirgains in North American session USD/JPY is likely to follow. FX Upcoming Currency GMT EST Release Expected Prior EUR 11:00 6:00 EUR German Industrial Production (OCT) -1.5% -3.6% CAD 13:15 8:15 CAD Housing Starts (NOV) 199K 212K Boris Schlossberg http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.