Asian Session - Continued Pressure on European Financial Sector

Market Brief

The Usd continued to gain strength in the Asian session, as escalating problems in the European banking sector unnerved participants. The EurUsd slipped, trading down from 1.3724 to 1.3561, while the UsdJpy slipped from 105.43 to 102.87. Asian equities sold off, with Shanghai down -4.61% and European indexes poised to open lower. Crude prices slid to $91.30bbl, while spot gold fell -0.79%, despite the increase in risk aversion. VIX is still well elevated at 45.14, although the Emergency Economic Stabilization Act was passed broadly in the House of Representatives on Friday and quickly signed by President Bush (Friday, Wall Street closed lower).

The passing of the EESA will help prop up prices of distressed financial assets and begin instilling confidence among banks. However, it will take a while to fully implement and until then the international financial system will stay under stress. Over the weekend, German officials were required to step in to renegotiate a rescue package for one of the country's largest banks and then also declare a full guarantee on all private savings, following Ireland's move last week. Quickly after, Denmark followed with its own guarantee plan and we expect other European countries to follow suit. There has been increasing call for a comprehensive European plan. The way markets shrugged off the last week negative US data, including Friday NFP, which fell -159k, illustrates the markets focus. With the financial sectors turmoil defining trading patterns, including FX, markets will be focused on the unfolding developments, rather than underlying economic fundamentals or traditional correlations (ie oil and Usd). In this current environment, we expect the Usd to continue to gain strength.

Perhaps the only economic events which will give the markets pause will be the BoJ and RBA rate announcements this week. We expect the BoJ to unanimous vote for rates to remain on hold with a great focus on developments in financial markets. In regard to the RBA, we are looking for a 50bp cut. However, with the hastily deteriorating position of the developed economies, the RBA might be forced to ease further to shore up growth.

Currency Tech

AUDUSD
R 3: 0.7944
R 2: 0.7818
R 1: 0.7738
CURRENT: 0.7500
S 1: 0.7416
S 2: 0.7379
S 3: 0.7270

EURJPY
R 3: 148.69
R 2. 146.85
R 1: 144.97
CURRENT: 140.32
S 1: 139.92
S 2: 139.15
S 3: 138.24

USDSGD
R 3: 1.4859
R 2: 1.4760
R 1: 1.4698
CURRENT: 1.4606
S 1: 1.4537
S 2: 1.4458
S 3: 1.4374

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