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Daily Forex Commentary

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Do I hear a bid for Lehman?

Fri, Sep 12 2008, 06:37 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Worries about the health of the financial sector in general and troubled US bank Lehman Brothers in particular dominated market sentiment on Thurdays. Stocks and interest rates fell for most of the day before making a remarkble turnaround late last night on market rumours that US authorities and the Federal Reserve are involed in a possible sale of Lehman to one or several US banks. Apparently the deal is planned to be announced before the start of next week in an effort to calm markets down.
The Lehman story will be in focus today and might keep financial markets in a wait-and-see mode though still nervous and edgy.

Overnight both the JPY and the CHF has weakened slightly from yestday’s hight as the prospects of an end to the Lehman crisis has reduced risk aversions, at least for the time being. With markets so focused and driven by rumors expect volatility to remain high.

The USD also weakend overnight. One reason was a another rumors circling the markets yesterday about a possible rate cut by the US Federal Reserve at next week’s meeting. In view of last Friday’s weak US job report and recent lower oil prices, which have improved the outlook for inflation, markets have started to speculate about the chances of another US rate cut. Short term US rates fell yesterday and at the moment markets price in a 10-12 % chance of a 25 bp hike next week and roughly at 35 % chance of a cut before the end of the year.We doubt the Fed will cut as early as next week but still look for a cut before the turn of the year.

Emerging Markets

By the Emerging Markets Team

The fate and woes of Lehman Brothers continue to drive financial markets. After a bit of panic yesterday (where the CDS spreads on Lehman spiked to almost 800bps), markets thus calmed down as speculation of a possible buyer intensified (Bank of America has been mentioned), as did speculation that the US authorities are once again involved in bailing out the market. Lehman's CDS spread thus ended the day lower at around 540bps. EM also benefitted from calmer markets, although currencies like the ZAR and the TRY still ended the day down against the EUR. The EM calendar is practically empty today, and although the US does give us producer prices and retail sales, we think focus will remain squarely on the a possible resolution of the Lehman situation.
Any news of a prospective deal could be just what is needed to stabilise markets in the short run. Perhaps Hank Paulson will be the man to save the markets for the second consecutive weekend - but in a wider perspective, a solution without government involvement would obviously be preferable. Positionwise, we stick to our long EUR/ZAR position, although we have moved the stop up to the entry level. A Lehman take-over would most likely lift EM across the board - and hence also the ZAR, however much we dislike the fundamentals.

Today’s Key Events

• N/A Svein Gjedrem speaks, Norway
  

• 11:00 Industrial production, Eurozone
  

• 14:30 Producer prices, US

• 14:30 Retail sales, US
  

• 16:00 U of Michigan Confidence, US

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Published on  Fri, Sep 12 2008, 06:52 GMT