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Daily Forex Strategy Briefing

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Volatile USD, Gaining Yen, Following Deepening US Financial Crisis

Mon, Sep 15 2008, 23:55 GMT
by Hans Nilsson

CMS Forex

Volatile USD, Gaining Yen, Following Deepening US Financial Crisis

• The dollar had a volatile trading Monday after the drama on Wall Street including Lehman Brothers Holdings’ bankruptcy filing, the takeover of Merrill Lynch by Bank of America and continuing concerns about American International Group. These dramatic developments together with tumbling commodities increased speculation that the slump in the US financial markets and the economic slowdown will deepen. The greenback reversed large overnight losses against the euro and sterling as investors sought the relative safety of US government papers, and gained against the Australian and Canadian dollars. The yen and Swiss franc rose against other major currencies as US stocks fell the most since the 9/11/2001 terrorist attacks on increased fears about the health of the financial system.


• The USD/JPY dropped to a 2-month low as investors reduced holdings of higher-yielding assets financed in yen. There is support in the 104-area. If the support is broken, the next support is at the 101-handle.

Financial and Economic News and Comments

US & Canada

• US industrial production tumbled a more-than-forecast 1.1% m/m in August, the largest single-month drop since 1990 (except for the month of Hurricanes Katrina/Rita), following a downwardly revised 0.1% m/m increase in July, according to data from the Federal Reserve. August’s IP fell 1.5% y/y. Capacity utilization declined more than expected to 78.7% in August after July’s downwardly revised 79.7%. The 1972-2007 average is 81.0%. Manufacturing production decreased 1.0% m/m in August, with most of the loss due to an 11.9% m/m drop in motor vehicles and parts, ending the sharp rebound that had occurred in June/July. Manufacturing capacity utilization fell to 76.6% from July’s 77.5.

• The NY Fed manufacturing index unexpectedly dropped to -7.4 in September, showing a contraction in NY manufacturing and the lowest reading since June, from 2.8 in August, the Federal Reserve Bank of New York said. The employment measure fell to -4.6 from -4.5, signaling more firings. The prices paid index posted its biggest drop since the survey began in 2001, showing a sharp decline in inflation pressures.

• Treasury Secretary Henry Paulson said he never considered bailing out Lehman Brothers Holdings Inc. “The situation in March and the situation and facts around Bear Stearns were very, very different with what we were looking at in September,” Paulson said at a White House briefing. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.” He also said a government loan to American International Group Inc. is not currently an option. “What is going on right now in New York has got nothing to do with any bridge loan from the government. What’s going on in New York is a private sector effort, again, focused on dealing with an important issue that’s, I think, important for the financial system to work on right now,” Paulson said.

Europe

• The Bank of England should lower its benchmark interest rate to 4.5%, the most in seven years to halt a recession, the Confederation of British Industry said.


• The European Central Bank and the Bank of England joined the Federal Reserve in taking action to soothe financial markets following Lehman Brothers Holdings Inc.’s bankruptcy filing. The ECB said it awarded banks €30 billion ($43 billion) in a one-day money-market auction that was more than three times oversubscribed. The Bank of England loaned banks £5 billion ($9 billion) for three days.

Asia-Pacific

• The People’s Bank of China cut interest rates for the first time in more than six years on concerns about the spillover from the US economic slowdown. The one-year lending rate will fall to 7.20% from 7.47%, effective Tuesday. The PBC lowered the reserve ratio at the nation’s smaller banks by 1 percentage point.

FX Strategy Update

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Published on  Tue, Sep 16 2008, 00:03 GMT