Forex Market Comments by Finexo

Late US equity rally sparks comeback for JPY crosses, sees USD easing. Credit spreads show little relief in risk aversion so far, however.

Lehman CDS settlement coming back to haunt markets? University of Michigan to show double-dip in US confidence?

LATEST HEADLINES

• US Sep. Industrial Production dropped -2.8% vs. -0.8% expected
• US Sep. Capacity Utilization fell to 76.4% vs. 77.9% expected and vs. 78.7% in Aug.
• US Oct. Philadelphia Fed out at -37.5 vs. -10 expected
• US Oct. NAHB Housing Market Index fell to 14 vs. 17 expected and 17 in Sep.
• Japan Sep. Nationwide Department Store Sales fell -4.7% YoY

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Finexo Latest Headlines

LATEST HEADLINES

• New Zealand Q3 NZIER Business Opinion Survey rose to -19 from -64
• Australia's RBA cut rates 100 bps vs. a 50 bp cut expected
• Australia Sep. AiG Performance of Construction Index fell to 31.8 vs. 43.1 in Aug.
• Bank of Japan left target rate unchanged at 0.50% as expected

MARKET COMMENTS

Surely yesterday was some kind of short-term capitulation across markets: we certainly hope so, as AUDJPY was down as much as 13%+ on the day before the big bounce overnight. The RBA cut a surprise 100 bps - which really shouldn't be surprising considering the market action of late and shows more foresight than what we are seeing from the BoE and the ECB. The AUD selling was so overdone that the 100 bp cut may actually be seen as a good sign that the RBA is at least willing to do something to shore up the economy relative to other central banks (notably of the European variety), interest rate differentials aside.

Despite shifting into outright panic mode yesterday that lasted well into the North American session, signs of hope materialized into the close in the US and continued a bit overnight, with very robust bounces in equity indices (S&P500 is up some 6% from its lows of yesterday as this is being written) A chunky bounce, to the say the least, also arrived in JPY crosses - which would of course look more impressive were it not for yesterday's cliff-diving act.

The credit crunch grinds on, but the next step by the Fed is beginning to crystallize: the need to extend credit directly to institutions that desperately need to roll over their debt and can't get funding from banks, where all lending has essentially stopped. This is a lead story almost across the board and must be followed closely - as this step will be needed to prevent a total meltdown and immediate real economy effects (the longer term economic effects of all this have already been set into motion) In other words, the Fed's drastic liquidity measures are not spilling over to non-banking institutions and now they are very likely to address this problem with an unprecedented move into unsecured lending. Watch Bernanke's appearance today for a follow-up on this story. Such a move could prop up the corporate commercial paper market and the state and local government debt markets and finally start to rein in some of the credit spreads that are signalling totally frozen credit of late. If these measures are able to bring credit spreads down in the coming days, we may have room for a further relief rally in risk appetite (with usual implications for JPY and CHF) . The situation for the EUR is less clear, as the policy response has been, and may continue to be, far more difficult due to the unworkable ECB/fractured national framework.

The UK Chancellor Darling is also hatching a plan to invest government funds in banks in exchange for shares in those banks, in a program modelled after a Swedish bank rescue executed in the early 1990's.

There's also talk of a coordinated global rate cut arriving as soon as this weekend's G-7 meeting after the RBA cut 100 bps overnight. Certainly, this is a sentiment booster if it happens, and is particularly necessary in the UK and in the EuroZone. But credit markets remain the key....

GBP/USD – 2 year high for the dollar in sight of Britain's frail economy

Data on the UK's gross domestic product has revealed no changes in the second quarter at 0.2% quarterly growth, its lowest in 16 years. This rose investors' expectations that the Bank of England would cut interest rates. This as well as weak data from the European region gave support to the dollar.

Despite the weakening of global economies and the resulting boost of the dollar, traders remained skeptic about the continued rise of the dollar due to the frail U.S. financial system. Traders will be closely monitoring U.S. housing data to be released this week, as well as new developments about the future of Lehman Brothers investment bank and mortgage giants Fannie Mae and Freddie Mac.

I believe that market focus for the near future will be on the sterling and oil prices – two key elements in keeping the dollar stable. Oil prices fell the steepest fall in 4 years on Friday to below $115, thus increasing the dollar's gains. Moreover, Investors will act carefully at this week's housing data, which might limit the dollar's gains, yet they have no reason to sell the dollar for now.

The sterling fell to $1.8415, its lowest rate since 2006. This slide brought about unexpected short positions in the sterling, perhaps making it possible for the currency to recover.

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Britain economy facing crisis

Concerns about the economy of the UK weakened sentiment, thus hurting the sterling which dropped to a 21-month low on Monday. According to a recent survey, businessmen and factory owners do not expect the growth of their businesses in the near future due to the poor state of the economy. More than a third of business owners believe that they will have no choice but to cut jobs and bonuses.

Despite July's manufacturers' costs falling more than expected, the numbers were still higher than last year's, providing some support to the pound. This also sparkled expectations of an interest rate cut from the Bank of England, meant to boost economy growth. I think now that the economy is in such a bad shape, any encouraging news matters and will surely make some difference.

Actually what i believe is that the expectations of a cut in interest rates usually damage the currency by lowering its yield advantage, yet in the case of the UK economy in which growth has slowed so significantly, these prospects easing the UK's borrowing costs, could actually become an advantage.

Until the present, the BoE has been stuck between a rock and a hard place, with growing inflation on the one hand, and the limited ability to cut interest rates in the face of no growth, on the other. The Financial Services Authority of Britain has issued a statement that the industry should prepare itself for a possible crisis; similar to the one Britain went through during the 1990s recession.

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