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Daily Forex Commentary

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Fed Funds Unchanged at 2%

Wed, Sep 17 2008, 06:12 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Some relief sentiment has entered the market as the U.S. Government agreed to rescue mortgage insurer American International Group (AIG) with a $85 billion loan from the Federal Reserve of New York. The U.S. Government will in return receive an 80% stake equity interest in AIG and can veto any dividend payments to common and preferred shareholders. Barclays has announced that it has agreed to buy Lehman Brothers North American investment banking and capital markets divisions (including New York headquarters). Morgan Stanley’s earnings were better than the market expected, but there is still some concerns in the market whether or not the bank is going to continue as an independent bank. The Federal Reserve kept the fed funds rate at 2% and gave thereby no gifts to the stressed financial markets. The statement acknowledged the elevated stress in financial markets and that the tight credit conditions could weigh on economic growth, but otherwise it was a relatively dull statement. There is no doubt that the financial markets have taken overnight developments positively. However, it is still way too soon say that everything is back to business as usual – well you could probably argue that we are back to business as usual as per the last 14 months.
Overall, there are still a lot of uncertainties out there and volatility is likely to remain high for the time being. That said, relief sentiment is likely to dominate (unless other bad news are going to disturb the picture) today’s session.

Emerging Markets

By the Emerging Markets Team

The FOMC disappointed some in the market by keeping rates on hold. Initially this was disappointing for the markets and equities were dropping. However during the night the US government agreed to lend as much as 85 billion dollar to AIG to save the biggest insurer in USA from collapse. By these two actions FED chairman Bernanke is betting he can use targeted emergency loans rather than another key rate cut to fight the credit crisis. Looking at Emerging markets we keep our recommendations and have the following comments:
TRY: We look forward to the interest rate meeting tomorrow. We expect the central bank to be credible and keep the key rate unchanged at 16.75 %. This should help supporting the TRY and therefore we keep our range.
PLN: Yesterday the Polish government opened talks about a timetable for euro adoption with central bankers for the first time. After the meeting Tusk told reporters that Poland should meet all euro adoption criteria in 2011 and expects a positive decision on the adoption from the European Commission. He added that a detailed timetable for the euro adoption will be ready in mid-October. This has been very positive for PLN with EURPLN dropping from 3.42 to 3.34. Of the 5 criteria, inflation is likely to be the most problematic for Poland and 2011 is in our view still very optimistic.
ISK: Locals are increasingly getting pro-Euro and pro-EU with the latest polls showing that 55 % + of people want to adopt both. The question is also getting increasingly serious among politicians. However short term EURISK will still be trading around the 131 level because of the risk aversion in global markets.

Today’s Key Events

• 11:00 Eurozone Trade Balance, EUR
  

• 12:00 CBI Industrial Trends, GBP
  

• 14:30 Housing Starts, USD
  

• 14:30 Building Permits, USD

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Published on  Wed, Sep 17 2008, 06:36 GMT