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Daily Forex Commentary

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From "It's all going to H…" to "Euphoria" in an instant

Mon, Sep 22 2008, 07:03 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

OMG what a week we just had. What we experienced last week will most likely be in the history books of the future. Everything was flying around in a market with extreme volatility. We saw flight to quality in a magnitude rarely seen; investors were fleeing into US Treasuries selling risky assets and an instant later the central banks or the US Government intervened and euphoria was all over the place. During the weekend, the Bush administration finalised the rescue package and sent it to Congress seeking authority to handle probably the worst crisis since the Great Depression. Details of the rescue plan are still uncertain, but we do know that the proposed package features an option to buy up to $700 billion of home and commercial mortgages and related assets from US banks. This should enable the US Government to gather all the toxic securities in one government-controlled company removing them from the balance sheets of the stressed banks. Hopefully, this will improve the trust between banks and boost the credit markets. Short selling has been banned in the US and in the UK for financial companies and in Australia the Australian Securities and Investment Commission has banned ALL short selling. We still prefer to stay on the sideline with our short-term recommendations, which means that we have only updated a few ranges in our table. Today we are leaning towards a positive day, but as we all witnessed last week, positive sentiment can vanish in an instant. The financial markets will most likely be awaiting details of the rescue package and listening to central bankers who are on the wires during the day.

Emerging Markets

By the Emerging Markets Team

Whatever else you may think of Pres. Bush Junior, he does have a refreshing way of putting things simply and clearly: when adressing the proposed rescue package he said that "This is going to be a big package because it's a big problem"! You can say that again, mr. President! While EM currencies also benefitted from Friday's huge relief rally - and could do so further in the days to come - we think that uncertainty remains huge, not the least on the exact form of the rescue package. While Mr. Paulson was asking for full power to spend the 700bn USD (to begin with), including a guarantee that his decisions could not be challenged by the courts. Politicians who are in fact handing him a blank cheque will most likely require tight controls and accountability - not the least because the money will go to help the banks that the politicians are in fact blaming for the whole mess to begin with.
Hence, the week ahead will only be about news and rumours on the rescue package, with local stories still more or less immaterial. Considering that EM currencies weathered the storm well last week, this should also leave upside limited. Hence, uncertainty rules! One position we do stick to is our short ISK position. While the credit spreads did come down slightly for two of the large Icelandic banks on Friday, one actually went higher, leaving the average higher on the day. Distrust of the Icelandic banking sector remains very high, leaving the ISK exposed.

Today’s Key Events

• 09:00 ECB’s Trichet speaks, EUR

• 10:00 BoE’s Gieve speaks, GBP

• 14:00 Core Inflation, PLN

• 14:30 Retail Sales, CAD

• 17:30 FED’s Fisher speaks, USD

• Download Full Daily Forex Commentary

Published on  Mon, Sep 22 2008, 07:42 GMT