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Asian Session − US Bailout Passes Senate & Risk Aversion Stays Elevated

Thu, Oct 2 2008, 09:01 GMT
by Peter Rosentreich

ACM - Advanced Currency Markets

Market Brief

The Usd rallied strongly in Asian session, as the US Senate passed a sweeping bailout plan by a margin of 74-25. The EurUsd fell from 1.4090 to 1.3921, while the UsdJpy bounced around the 106.12 to 105.60 levels. While yesterday Senate vote was widely expected, we are still not seeing an increase in risk appetite and worrying developments in both the US and European financial sectors keep confidence low. The inclusion of $100bn in tax cuts will keep the vote in the US House of Representatives a very close call and sustain event risk. Wall Street closed lower and Asian region stock indexes are following the downwards trend, with the Nikkei -1.87%. Commodities moved higher, with crude prices trading to $98.31bll and gold $871.53oz.

In Europe, there are conflicting reports (not a good sign) over a reaction mechanism, should pressure on banks intensify. There are the rumors that the European Union will create an emergency fund, while some European Union countries have pledge to deal with the matter individually. A summit of Euro zone officials has been announced for Saturday to deal with the issue.

The focus of the day will be the ECB rate decision. The recent events in the financial sectors have completely changed the dynamics of this meeting. We expect the ECB to hold rates steady at 4.25%. However, there is a slight (and growing) probability of a cut. Since last month's meeting that the economic conditions have deteriorated further and unprecedented developments in the financial markets (with Fortis and Dexia both needing bail-outs.) demand some sort of action.

However, Trichet stated, as recently as Tuesday, that "the ECB makes a clear separation between, on the one hand, the determination of monetary policy and, on the other hand, its implementation using liquidity operations". He also stressed the ECBs primary objective is price stability and anchoring inflation expectations. The ECB has reacted with force by adding an overnight maturity to US dollar funding facilities, increasing dollar funding operations to $110bn from $50bn. The market is not expecting the ECB to use monetary policy to contain the crisis, but will be looking for Trichet to define its role and response mechanism in an event the crisis is amplified. We expect a change in language, softening regarding inflation and the overall meeting should be Euro negative.

Currency Tech

AUDUSD
R 3: 0.8380
R 2: 0.8348
R 1: 0.8097
CURRENT: 0.7892
S 1: 0.7802
S 2: 0.7676
S 3: 0.7616

EURJPY
R 3: 155.81
R 2: 155.22
R 1: 151.36
CURRENT: 147.50
S 1: 147.04
S 2: 146.21
S 3: 145.75

USDSGD
R 3: 1.4542
R 2: 1.4478
R 1: 1.4414
CURRENT: 1.4398
S 1: 1.4238
S 2: 1.4184
S 3: 1.4054

• S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

Published on  Thu, Oct 2 2008, 09:08 GMT