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Quadruple Testimony to Prop Dollar, Equities...Temporarily

Tue, Sep 23 2008, 12:50 GMT
by Ashraf Laidi

CMC Markets

We expect Today’s quadruple testimonies (Fed’s Bernanke, Treasury’s Paulson, SEC’s Cox and OFHF’s Lockhart 9.30 am EST) at the Senate Banking Committee addressing the “Turmoil in US Credit Markets” to serve their primary purpose of averting prolonged damage to the financial system and fare as an effective booster of confidence to US equities and the dollar for the day. With no major US economic data due for release, the four officials will seek to do what their respective institutions did exactly seven days ago; convey a sense of optimism to the financial markets by assuring that the central bank (via liquidity injections), the Treasury (via purchasing bad debt), the SEC (via limiting short sales) and the Office of Federal Housing Finance (via added homeowner relief) will work collectively to shore up confidence in the financial system and the economy.

To the extent that the current market turmoil is caused by lack of confidence, official demonstrations of unified assurance have worked in temporarily stemming market erosion. But the culprits go far beyond sentiment and confidence, extending towards dislocated credit market dynamics and weakening macroeconomic fundamentals. Accordingly, we anticipate prolonged strength in stocks and the greenback throughout the Tuesday session, until sentiment fades at the beginning of the European Wednesday session when dollar longs are seen curtailed ahead of the highly awaited release of Germany ’s September IFO survey of business sentiment. More on IFO in EUR section below.

Temporarily Euro Retreat Limited at $1.4680

In line with our expectations of a positive market reaction to today’s quadruple Senate testimony, Euro is to join European and antipodean currencies in amassing some of Monday’s gains, especially as the excessive moves in oil prices are expected to stabilize. The morning’s release of Eurozone September PMI data were spectacularly dismal, highlighted by the worst reading in the manufacturing index since December 2001 and the lowest reading in the services index since June 2003.

Euro losses are seen extending down to $1.4710 and $1.4680 before some stability is likely to ensue ahead of Wednesday’s 4 am EST release of the September IFO survey. Although the Business Climate and Current Assessment indices are both expected to show the fourth consecutive monthly declines, we anticipate a surprise increase in September to result from positive responses on the basis of lower oil prices and a weaker euro. This was the reason to the unexpected rise in last week’s release of the ZEW survey and we expect it to do the trick for the September IFO. Since the IFO survey has acted as the most consistent trigger of major euro moves (upside and downside), we expect Wednesday’s release to prop the euro back above the $1.4750s and onto $1.4865-70. But prior to this, we’re to see temporary lows near $1.4680s.

Dollar to Target 107 yen

Our expectations for a sharp upswing in risk appetite are seen dragging the Japanese currency across the board, producing the greatest leverage in the USDJPY pair. Dollar bulls will have to negotiate extensive selling interest at 106, a breach of which is seen propelling the pair past 106.40-45 and onto 106.75. These historically volatile times are capable to produce another 2.-50%-3.00% daily upswing in major equity indices, which are to be joined by further USDJPY gains towards the high 106.80s near the Asian session.

Cable seen Breaching Below $1.8450

We expect GBPUSD to continue its downward retracement from Monday’s 4-week high of $1.8633 down to $1.8500 and onto $1.8370. The rhetorical support of the aforementioned four testimonies and the supplications from members of the Senate Banking Committee will likely produce a USD-centric rally, which will not highlight sterling’s eroding fundamentals and likely trigger the next low near the end of the Wednesday Asian session at $1.8280.

Best

Published on  Tue, Sep 23 2008, 12:52 GMT