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Daily Forex Commentary

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Brace yourselves…

Tue, Sep 16 2008, 06:19 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Yesterday European stock markets took a nosedive after the disturbing news of the collapse of Lehman Brothers, Bank of America’s purchase of Merrill Lynch and the problems surrounding the insurance giant AIG.
Credit spreads widened massively and the liquidity injections made by both the ECB, the BoE and the Fed seemed to do little to ease tensions. Thus in the deposit market the O/N USD rate - which traded around 2,50% as the European session was initiated - was traded around 5% as the NY session began.
In conclusion the outlook for today is rather gloomy and at this point we advise investors to lay low. However to give an indication of direction there is no doubt that we will be in for further carry unwind, i.e. a strengthening of the funding currencies (including JPY and CHF) and a weakening in high-yielders (including AUD and NZD). Furthermore further scandieweakness seems likely as investors continue to unload NOK and SEK denominated assets.

On the macro economic front all eyes will be on the Fed who is scheduled to announce interest rates at 8:15 pm. In the wake of the recent events surrounding the financial sector in the US rates have dropped massively across the curve and market participants are currently pricing in a 68% probability of a 25 bps rate cut today. Recent events certainly seem to have increased the possibility of a cut tonight.
However at this point speculation in the markets of a 50 bps cut seems exaggerated and as history has shown rate cuts have done little to resolve the confidence issues amongst players in the financial sector so far.

Emerging Markets

By the Emerging Ma rkets Team

Financial markets responded to the weekend's events as you would have expected: global equities are down some 4-5%, credit spreads soar, money markets freeze up and EM gets a hammering. Hence, no doubt that we are in for a very difficult time for EM currencies, with financial jitters reaching new highs. Focus will be mainly on whether central banks around the world will support markets by cutting rates much earlier than expected. So far, central bank reaction has been 'by the book' - page one of any central bank crisis manual reads 'Pump out liquidity', just what we saw from the FED, the ECB, the BoE and the Danish central bank (among others) yesterday. Hence, we are not getting our hopes up ahead of the FED meeting tonight. Although we have previously seen markets twisting the arm of central banks, a 50bps rate cut would leave the FED with preciously little remaining in its arsenal - and as for the ECB, recent rhetoric has certainly not been promising so we won't even go there.
Rumours of coordinated rate cuts thus seem somewhat exagerated - although such a move seems to be the best hope we have of a shortterm stabilisation of markets. This leaves markets unpleasantly exposed for the time being, and we thus continue to recommend a cautious stance. Positionwise, our short ZAR position is probably not the unwisest place to be! The FED meeting aside, focus will remain on whether other financial institutions buckle under the intense pressure, with AIG (the US insurance giant) first and foremost in people's minds. AIG is supposedly chasing 70-75bn USD in capital - a hunt which was not made easier by yesterday's downgrades from S&P and Moody's. Should AIG fail, we fear that yesterday's mayhem will look like calm markets in comparison - so we keep our fingers crossed for a benign outcome!

Today’s Key Events

• 09:00 Retail sales (CZK)

• 10:30 Consumer prices (GBP)

• 11:00 ZEW index (DEM)

• 11:00 Consumer prices (EUR)

• 14:30 Consumer prices (USD)

• 15:00 TIC flow (USD)

• 20:15 FOMC rate announcement (USD)

• Download Full Daily Forex Commentary

Published on  Tue, Sep 16 2008, 06:26 GMT