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Daily Forex Strategy Briefing

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JPY and USD Drop on Global Stock Rally

Mon, Oct 13 2008, 13:50 GMT
by Hans Nilsson

CMS Forex

JPY and USD Drop on Global Stock Rally

• The dollar and yen fell against other key currencies Monday as US and international stocks rallied on optimism the G-7 is taking coordinated steps to confront the global financial crisis. The stock rally induced by governments’ new moves makes it possible for the stock markets to finally find support. Sterling rose as the UK would inject as much as $64 billion into banks. The Australian and Canadian dollars rose as commodity prices recovered some of last week’s heavy losses. Brutal equity sell-offs supported the yen as investors unwound carry trades. We are taking profits on our short USD/JPY position and raising the stop of our long USD/CAD position to lock in profits.

• The EUR/USD rose after leaders of the 15 eurozone countries agreed to a plan that will guarantee loans in the interbank market and allow governments to buy stocks in distressed financial companies. Trading above the 1.35 support for most of the day, the EUR/USD is in a strong downtrend but extremely oversold. Therefore, we expect the pair to consolidate losses and trade between 1.35 and 1.39 this week. There are significant resistances in the 1.39-1.40 area and supports in the 1.35 and 1.32.

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Financial and Economic News and Comments

US & Canada

• The US economy has entered a recession. Despite a marginal improvement to -3.2 in August from -3.5 in July, the qEcon Research/Globicus leading economic index still shows a strongly negative downtrend for the US economy. The improvement was due to an increase in consumer expectations, which may not last. The US recession has started around the end of 2007 as the coincident index, which measures the current economic activity, peaked in November 2007. The index shows the US economy is rapidly deteriorating, with a negative 2.3 smoothed growth rate.

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• The leading economic index shows the US recession has been deepening with the short leading index at -6.6, a 26-year low. The credit crunch and deleveraging are likely to make this recession more severe than the previous one. The deepening recession in the US may not necessarily pressure the dollar as the global economy is also slowing down.

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• Interim Assistant Secretary for Financial Stability Neel Kashkari said the Treasury tapped law firm Simpson Thacher & Bartlett LLP to provide advice on taking equity stakes in banks. He detailed several steps the Treasury had taken to ramp up the Troubled Asset Relief Program (TARP) in the last 10 days. “A program as large and complex as this would normally take months - or even years - to establish. We don’t have months or years. Hence, we are moving to implement the TARP as quickly as possible while working to ensure high quality execution,” Kashkari said.

• Treasury Secretary Henry Paulson called top US banking chiefs to a meeting in Washington, and is expected to discuss details of his new plan to take equity stakes in financial firms.

Europe

• The UK PPI output (prices charged by factories) dropped for a second month, declining 0.3% m/m in September, following a 0.7% m/m decline in August, the Office for National Statistics said. The PPI input (raw material costs) fell 1.2% m/m in September. The PPI output rose 8.5% y/y, while the PPI input gained 24.5% y/y. The core PPI output ticked lower to 5.4% y/y from August’s 5.6% y/y. The figures suggest the Bank of England will likely cut the benchmark interest rate further over the coming months as the UK is on the brink of a recession.

• European leaders agreed late Sunday to a plan that would inject billions of euros into their banks in a bid to restore confidence to the teetering financial system. The agreement among the eurozone leaders helped trigger a rally in stocks and the euro after a market rout.

• France, Germany, Spain, the Netherlands and Austria committed €1.3 trillion ($1.8 trillion) to guarantee bank loans and take stakes in lenders. The UK took majority stakes, an unprecedented £37 billion ($64 billion) bailout, in Royal Bank of Scotland Group Plc and HBOS Plc.

Asia-Pacific

• China’s trade surplus widened to a record $29.3 billion in September following August’s $28.7 billion surplus, the Customs General Administration said. Exports gained 21.5% to $136.4 billion in September after climbing 21.1% in August. Imports rose 21.3% to $107.1 billion after August’s 23.1% rise.

• Asia’s developing economies may struggle to access capital as the credit crisis deepens, Asian Development Bank President Haruhiko Kuroda said. The region’s policy makers should prepare plans to maintain stability in their markets to counter volatility in the global financial system, Kuroda said in a statement to the International Monetary Fund and World Bank Development Committee.

FX Strategy Update

Published on  Mon, Oct 13 2008, 23:40 GMT