Forex Trading Commentary: Fed And US Government Take Steps To Shore Up Sagging Financial System

EURO

The euro depreciated vis-à-vis the U.S. dollar Friday as the single currency tested bids around the US$ 1.4150 level and was capped around the $1.4350 level. The common currency clawed its way higher early in the North American session as traders reacted to unprecedented moves by the Federal Reserve and U.S. government to shore up the sagging U.S. financial system. First, U.S. policymakers met last night and intimated they will likely soon seek Congressional approval to establish a Resolution Trust Corporation-type entity to manage banks’ toxic assets; details about such a plan could emerge next week.

Second, the U.S. government has imposed rules to restrict short-selling on 799 U.S. equities through 2 October in a bid to give the market a bid. Third, the Federal Reserve announced it will guarantee some money market funds in a bid to reverse the tens of billions of dollars that have left those investment vehicles over the past week. Fourth, the Federal Reserve and other global central banks continue to ply the financial markets with U.S. dollars in an attempt to reduce U.S. lending rates.

The European Central Bank tendered US$ 40 billion at 3.5% today and key interbank Euribor lending rates reached a new high on Friday with one-week Euribor reaching 4.546% and six-month rates at 5.235%. U.S. stock futures implied cash markets would explode higher out of the gate but dealers are curious to see how sustainable gains may be after the announcement of these extraordinary emergency measures.

In eurozone news, the German producer price index was off 0.6% m/m and 8.1% y/y in August. Euro bids are cited around the US$ 1.3840 level.

JPN/CNY

The yen depreciated sharply vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥107.95 level and was supported around the ¥105.40 level. The pair rocketed to a weekly high after traders digested comments from U.S. policymakers that indicated a plan is being created to manage financial institutions’ distressed assets. Finance minister Ibuki verbally intervened saying “The governments and central banks of (advanced) countries are fully prepared to cooperate in…defending the dollar, which is the international base currency.” Bank of Japan Governor Shirakawa talked about the central bank’s monetary policy, noting “We have no pre-determined conclusion. You just talked about an urgent rate cut. Central banks, including the BOJ, always consider all options. That’s our principle.”

The Nikkei 225 stock index climbed 3.76% to close at ¥11,920.86. U.S. dollar bids are cited around the ¥102.45 level.

The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥154.80 level and was supported around the ¥150.75 level. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥195.90 and ¥96.65 levels, respectively.

The Chinese yuan lost marginal ground vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8350 in the over-the-counter market, up from CNY 6.8340. Chinese Investment Corp, China’s sovereign wealth fund manager, did not provide any confirmation that it is in talks to purchase Morgan Stanley or Goldman Sachs. China has launched a trade dispute against the U.S. at the World Trade Organization involving the U.S.’s imports of pipes and tires. The Chinese government reported consumer price inflation is likely to continue its downward trend in H2 2008.

STERLING

The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7915 level and was capped around the $1.8185 level. Bank of England conducted a US$ 40 billion tender for dollar funds that expire Monday at a weighted average tender rate of 2.803%. Most traders expect BoE will effect at least one rate cut before the end of the year, possibly as early as October. Many U.K. financial institutions remain cash-strapped across Europe. The biggest obstacle to lower rates in the U.K. remains stubbornly-high inflation. Cable bids are cited around the $1.7605 level.

The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.7930 level and was supported around the ₤0.7860 level.

SWISS

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1280 level and was supported around the CHF 1.1040 level. Technically, today’s intraday low was right around the 50% retracement of the move from CHF 1.2465 to CHF 0.9645. Swiss National Bank allotted US$ 10 billion in overnight U.S. dollar repo at a weighted average of 2.78%. Swiss National Bank President Roth last night reported “What’s noteworthy is that the Swiss franc is not destabilized at all by what is going on. The Swiss banking sector is very strong. Our banks are well capitalized by international comparisons.”

U.S. dollar offers are cited around the CHF 1.1430 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.6035 and CHF 2.0310 levels, respectively.

Posted in Categories: Contributor, Economy, Eurozone, External Research, Forex, Japan, Switzerland, UK, USA.

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