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Market Turmoil Sends JPY Soaring

Tue, Sep 16 2008, 21:38 GMT
by Korman Tam

Forexnews.com

9/15/2008 10:00 pm: EUR/$..1.4226 $/JPY..104.24 GBP/$..1.7944 $/CHF..1.1128 AUD/$..0.7896 $/CAD..1.0700

Market Turmoil Sends JPY Soaring

Heightened risk aversion dominated the markets at the start of the week amid a fresh bout of turmoil in the financial sector. The combination of Lehman Brothers filing for Chapter 11 bankruptcy, Merrill Lynch being acquired by Bank of America and fears of AIG teetering near the brink sent ripples through the major equity bourses with the Dow Jones plummeting by 4.42%, the Nasdaq lower by 3.6% and the S&P 500 plunging by 4.71%. The yen advanced sharply across the board as traders unwound risky positions, rallying toward the 104-level against the dollar and advancing to the 186-region versus the sterling.

Earlier in the session, credit rating agency S&P’s cut the long-term rating for AIG from AA- to A-, citing a “combination of reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses”.

A barrage of US economic reports is slated for release on Tuesday, including August real earnings, CPI, net Treasury capital flows, and the September NAHB housing market index. The key highlight for tomorrow will be the FOMC’s monetary policy decision, due out at 2:15pm. Prior to the events this week, the Fed was largely expected to leave rates unchanged at 2.0%. However, given the failure of Lehman Brothers and burgeoning fears of a domino effect on Wall Street as the malaise spreads under the increased scrutiny of counterparty risk, the Fed may be compelled to slash rates by 25-bp tomorrow to 1.75%. With crude oil retreating beneath the $100 per barrel level to a new 7-month low at $95.11, the easing of inflationary pressure will provide the FOMC with more leeway to stimulate the struggling economy with additional policy easing.

In the coming session, traders will digest inflation reports from both the UK and Eurozone, offering markets a glimpse of whether rate cuts from both respective central banks may be imminent. The UK August CPI figures are seen sharply higher, up 0.5% versus a flat reading in the previous month while edging up to 4.6% from 4.4% a year earlier. Also slated for release overnight will be Germany’s September ZEW survey, with economic sentiment at -54.0 from -55.5 while the current situation index is seen deteriorating further to -15.0 from -9.2.

Published on  Tue, Sep 16 2008, 21:52 GMT