Bearish view on the EURO

Finexo warnings about potential volatility here as we come into month end during thin US markets have so far proved unfounded, as markets have barely moved over the last 24 hours despite a flurry of very ugly data out of the EuroZone yesterday (cratering November confidence levels) and Japan overnight (we looked at household spending, industrial production and small business confidence - we're note sure what that strange jobless rate number is all about). The tendency remains for equity averages to tick higher and risk aversion generally showing signs of fading slightly, though nothing looks convincing so far. Still, beware the end-of-month fix today, which could create a bit of hectic activity. US markets are open for a half day of trading today. The "Thanksgiving Surprise" of 2006 happened on a Friday, when EURUSD zoomed through 1.3000 for the first time in a long time. Though looking at the context of the 2006 move, it had been preceded by a very large move on Wednesday of the same week that was clearly applying pressure to the key 1.3000 resistance level. By strange coincidence, the 1.3000 level is also in play here two years later, and it appears that Euro is working itself into an either/or situation again.

We have made our bearish view on the EUR fundamentals clear, but let's see if the market is listening...any attempt back through 1.3000 and 1.3080 would put the bearish view on hold until/unless a strong reversal appears. 1.2800 is needed for the bears to get a better technical argument for a further fall. With the ECB meeting next week and EURUSD tracking interest rate differentials relatively well again, we will get a resolution to this soon. Continued attempts by equities to rally and a hawkish ECB would probably send the pair on another wave higher. Our preferred scenario, however, has the ECB finally forced into a more dovish stance, perhaps surprising on the rate cut size (as the overnight rate should clearly have been 125 bps lower than it is currently at least a month ago) and the broader market rolling back over into risk averse mode. In the medium term, we can't conceive of any scenario that spread between European 2-year rates and US 2-year rates (currently around 109 bps vs. 200 bps in mid September and lowest daily close at 90 bps in late October) from shrinking further towards parity.

Awaiting next week for important events

Next week sees a whole slew of central bank announcements and important economic data. The major US data includes the two major ISM surveys and the employment report on Friday, which unfortunately looks like it will be an absolutely terrible one, considering that consensus payroll expectations are already lower than at any point during the 2001 recession. The BOE, ECB, RBNZ and RBA will all announce rate cuts next week as well. More on those next week

Finexo Market Review

JPY crosses recovered sharply as Asian equities fought back from new lows and on intervention risk.

Are short term highs in the USD and JPY behind us? Trichet signals rate ease next week from ECB. US Fed likely to cut 50 bps tomorrow.

MAJOR HEADLINES – PREVIOUS SESSION

• US Sep. New Home Sales rose to 464K vs. 450K expected and 452K in Aug.
• Japan Sep. Retail Trade fell -0.4% YoY vs. 0.0% expected
• Australia Q3 NAB Business Confidence fell to -7 vs. -8 in Q2
• Germany Nov. GfK Consumer Confidence rose to 1.9 vs. 1.5 expected and 1.8 in Oct.

Finexo Market Comment:

The weakness in emerging markets is feeding into pronounced weakness and confidence in the export-driven Germany economy and has been a factor in the weak EUR of late. This and declining inflation threats finally had Trichet out yesterday signaling that the ECB will lower rates next week - with a 50 bp cut likely both then and possibly also in December. German 2-year rates have plummeted from over 4.50% in July to about 2.60% yesterday and appear to be on their way to the 2.00% lows from the post tech-bubble lows. But not only are German exports threatened by the emerging market crisis. European banks are also very much on the hook, having been the chief lenders to emerging markets in recent years - and that's another way we can connect EUR weakness with EM weakness. For the EUR to consolidate, we will also need to begin to see more stabilization/liquidity in the EM currencies and markets. There are a few signs of this out there, but nothing definitive thus far.

JPY crosses have seen a huge rally overnight from very depressed levels. Initially, the market seemed to thumb its nose at the idea of BoJ intervention, even after the imminent threat of such intervention was made explicit with the unplanned G-7 statement yesterday which was essentially a public green-light for Japan to intervene at will. At these levels and considering the desperate liquidity conditions in the market, the market ought to take the threat more seriously - the BoJ has enormous firepower and this isn't 2003. The rally overnight is a sign that the market is taking this threat more seriously. As well, a new naked short-selling rule was moved forward to today in Japan and has given the Nikkei some short term support (originally, the move was scheduled for Nov. 4) As JPY crosses go, so likely also will go the USD crosses, meaning that this powerful new force in the markets may finally serve to halt the seemingly unstoppable declines we have seen. If nothing else, the move will now be far more fraught with choppy two-way action even if the decline continues, as Japan is likely drawing a line in the sand here.

The countervailing force in this market to any potential moves by the BoJ and other Central Banks' intervention efforts is the strong risk of both month-end and year-end-related forced liquidation by mutual funds and hedge funds as they contend with an avalanche of redemptions. The question is to what degree speculation has entered the picture and tried to take advantage of the desperation out there. The end of the month trade is upon us this week and may be a key test for where we stand on this front. If forced liquidations of assets continue to take the upper hand then the seemingly endless vortex of declines may continue.

In any case and especially after last Friday's action, we must underline that risk has never been higher in the markets and one must tread more carefully than ever in these markets.

Finexo Market News and Analysis

• FX: USD is lower and the market is so far not too impressed by the Paulson/Bernanke Plan.

• Fixed Income: Bunds rallying towards 114. Treasuries still offered. JGB’s seem to have bottomed out.

• Stocks: Most sessions moderately down.

• Commodities: Mostly ranging, but precious metals looking bid.

• In what has reflected the fact that the bank problems are not limited to American Banks, Hong Kong’s Bank of East Asia has now come under the strain of rumors of a bank run, although these rumors have been denied by the authorities and bank management. Hong Kong has not had any bank runs since 1993, the creation year of Hong Kong Monetary Authority.

• In a sign of further trouble to the global liquidity, Chinese banking regulators are speculated to be blocking Chinese domestic banks from lending to US financial Institutions in the inter bank markets. This has however has been denied by the Chinese Authorities.

• Facing a public discontent and resistance by the Congress, Treasury Secretary Paulson has stated his willingness to accept the changes to the rescue package that would ascertain that the bank executives are not unduly compensated within the rescue package and that the government could buy direct equity stakes in the firms being assisted.

• In a congressional hearing yesterday, the Fed Chairman Bernanke has repeated his warning over the serious threats to the financial system and highlighted that the spillover effects from the credit crisis to households and businesses can be already be seen.

• President Bush was later in a speech confirming the message from Bernanke/Paulson. The speech was surprisingly gloomy and compared the current crisis with that of the Great Depression.

Finexo Market Analysis

• FX: EURUSD blasting higher. Wild discussions about Bernanke/Paulson Plan…

• Fixed Income: 10-year contracts ranging or edging slightly lower. Fed’s Funds Futures indicating a 34% chance of a 35 bps. cut at the 29th of October FOMC meeting.

• Stocks: European session down by around 2%. US down by 3-4%. Asia down by 2%. Nikkei closed.

• Commodities: Gold up, trading around $900. Silver up, trading $13.4. Crude Oil up, trading $109.

• A combination of short-expiring ahead of October expiry, USD-weakness and news of higher imports from China have caused the largest single-day rise in crude prices, with the October contract closing at $120.92, or up 16%. At the same time, November contract saw Monday trading close over $110, or up nearly 7%.


• Details in the (so far) $700B Bernanke/Paulson Plan favour Morgan Stanley and Goldman, stories show. Critics state that the plan is far too cheap to have any impact and the real issue has moved from illiquidity to insolvency.

• Precious metals regaining some of the lost ground from the August-September sell-offs and most risk indicators are flashing and beaming. Only EURCHF not responding like it should in this environment (we should see massive unwinding).

• The USD is selling off dramatically. The USD Trade Weighted Index briefly touched the 50% Fibonacci retracement from the bottom in mid-July to the top in mid-September. The rapidly deteriorating US fundamentals and desperate nationalization of bad debt might lead to a break soon. These days, anything can happen…

Finexo Market news and Recommendations

• FX: CHF and JPY retreating after the rescue/bailout of AIG and the FOMC decision to keep rates at 2%. USD edging higher.

• Fixed Income: 10-years trading in big ranges, directionless.

• Stocks: US and APAC sessions +1% higher. Europe stock are down by 2-3%.

• Commodities: Crude Oil finally seeing some buying interest. Precious metals are consolidating.

• The markets are enjoying a broad based relief rally from the Fed assistance package that has been granted to AIG, the largest insurer by assets in the US. Considering the large potential implications of a the insurance company’s failure, Federal Reserve has decided to lend AIG $85B in return for a 80% share in the company stock, effectively nationalizing the firm.

• While leaving the policy rates unchanged at 2%, the US central bank can now be observed to focus increasingly on targeted, emergency short-term loans instead. The bank has also changed its general collateral policy, as it now allows securities firms to use stock holdings as loan collateral.

• The general rally in equities and carry trades also looks to extend to crude, with the oil prices rebounding from the steepest decline in 4-yr period. The oil prices have already seen a near 39% drop from the highs reached this year and have so far found support just above the $90 mark.

Finexo: Forex markets 15th Sept 2008

• FX: EURUSD forcefully rising to 1.4481. USD selling off on the Lehman and Merrill news. CHF and JPY only moderately higher.



• Fixed Income: Treasuries rallying more than a figure. Bunds will follow through today. JGB’s closed.



• Stocks: European session up +2% on Friday, but will gap open lower today. Nikkei closed. ASX down by 1.5%.



• Commodities: Precious metals only slightly higher despite the really weak dollar. Crude Oil trading below $100/bbl for the first time since April.

• Very, very, very negative news from The World of Finance: Barclays walk away from negotiations to take over Lehman (since deal was not Fed/Treasury (sponsored).Lehman now filing for bankruptcy. Make no mistake; there will be tonnes of losing among its counterparties. Financials will bleed this week.

• AIG might seek $40B help from the Fed after horrific losses, according to the WSJ. AIG very susceptible to downgrades.



• Merrill Lynch also under considerable pressure. Now discussing merger with Bank of America.

• FOMC meeting tomorrow. STIR Futures have changed, now indicating a 12% chance of a rate CUT in stead of a hike.



• US Treasury Officials have urged Japanse financial institutions not to dump bonds issued by FNM and FRE on the market. What a desperate move!

Finexo Forex news and Updates

• FX: EURUSD dipped to 1.3882 and might look ready for a bounce, but the 50% fibo level at 1.3840 might be “magnetic”.

• Fixed Income: Again large ranges, but no direction in 10- years.

• Stocks: European session down 0.5%, but US and APAC session both around 1% higher.

• Commodities: Gold, Silver and Crude all bouncing cautiously higher from yesterday’s close.

• Q2 GDP releases from Japan overnight show that the country’s economy has contracted at an annualized rate of 3%, with the slowdown rate the steepest since the last recession in 2001. A negative growth figure in Q3 would see the country technically enter a new recession.

• The markets globally are enjoying from a relief rally as speculation has grown that Lehman Brothers would be bought by another financial institution.

• The markets will be keenly observing the US August Retail Sales due out at 12:30 GMT. For the core, autoless figures, the median surveyed forecasts are pointing to a drop of 0.2%, which, if materialized, would be the first negative release in 6 months.