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Daily Forex Commentary

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IS the Crisis over?

Fri, Sep 19 2008, 06:24 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Yesterday the major central banks (FED, ECB, BOJ, BoE, BoC, and SNB) announced coordinated efforts to address the elevated pressure on the short-term US dollar funding.
The FOMC opened swap lines to the other central banks to provide dollar funding for both term and O/N liquidity (ECB: $180 billion, SNB: $27 billion, BOJ: $60 billion, BoE: $40, and BoC: $10 billion). The immediate reaction in the market was relief, but it only lasted to around closing hours in Europe. At that time markets started to turn around. Shortly thereafter, N.Y. Senator Chuck Schumer hinted that Fed officials are considering a more permanent plan to help deal with the stress in financial markets. During the Savings & loan (S&L) crisis in ’90 the Resolution Trust Corporation (RTC) was set up to remove the assets that no one trusts from the banks balance sheets. Several reports indicate that the US Government and the Treasury are working on similar arrangements (let’s for the fun of it, call it RTC part 2 – others already have). Risky assets kicked a….. when Senator Schumer hinted that something was going on – S&P and Nasdaq rose more than 5% and carry trades were again viewed as an interesting opportunity. JPY and CHF fell, but there was nowhere near the same positive effect as on stocks. The dollar rebounded versus the euro as the news about the arrangement came out and the short-term rate differential moved in favour of the greenback. In addition, Wall St. Journal is reporting that the SEC and FSA are working on banning short selling financial shares to avoid share prices crashing. And where do we go from here? The funding to RTC part 2 would have to be approved by the Congress and questions still remain of how long it will take to set up the structure. That said, there is no doubt that Hank Paulson and Bernanke will be working through the weekend in an effort to outline the plan before markets are opening in Asia Monday. At least there is at present a chance we can go on weekend without the world falling apart before we get back to work on Monday. Is the crisis over? –well how long did it take to clean up the mess from the S&L crisis? If – and we stress IF – this plan would fall apart, there is no doubt that it will be a major disappointment to financial markets…

Emerging Markets

By the Emerging Markets Team

Recently, markets have been left with the feeling that Tres. Sec. Paulson was running around with a broom, sweeping financial institutions up one by one as they dropped from the perch (or not, as it where, if he felt that they wouldn't bother others too much) but that nothing was done to address the root of the problem and to keep the remaining canaries glued to the perch. This all changed yesterday evening with the announcement of the possible public institution which would mop up bad assets of financial companies.
Hence, risky assets everywhere got a big lift on the hope that this is just what is needed to get financial markets going again. We have thus been stopped out of our short TRY and ZAR positions - but sometimes, it is actually quite nice to be wrong. Looking ahead, the key question remains whether markets have responded too kindly to the news - after all, the creation of such an entity is not without its problems - but for now, at least, we should head in to the weekend feeling much better. It is highly likely that the ISK will also benefit from this news, but as the ISK market is not yet open, we will wait and see whether our stop is hit at the open. While the ISK should get some tailwind for now, the fear of the collapse of one of the Icelandic banks is likely to be with us for some time to come, and caution is thus still warranted.

Today’s Key Events

• 08:00 PPI, DEM

• 08:30 Barbro Wichman-Parak speaks of the current situation, SEK

• 09:00 ECB’s Stark speaks, EUR

• Download Full Daily Forex Commentary

Published on  Fri, Sep 19 2008, 06:29 GMT