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USD seems to be losing steam, but still trading in a range

Mon, Nov 24 2008, 07:58 GMT
by John Hardy

Saxo Bank  |  View company's profile

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German IFO on tap today. Risk appetite trying to stage comeback in nervous market. Will it succeed?

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Germany Nov. IFO Business Climate (0900)

• EuroZone Sep. Current Account (0900)

• EuroZone Sep. Industrial New Orders (0900)

• US Oct. Existing Home Sales (1500)

• Japan BoJ Monthly Report (0500)

Market Comment:

The US government was forced to ride to the rescue of the Citigroup over the weekend, as it became clear of the course of last week that the bank would fail without prompt action from the authorities. The details of the rescue package are unique compared to recent measures (google the story for the details, the "backstop" idea for Citi's endless bad assets is one interesting part of this deal), but then again, the US Treasury, Fed and other financial authorities have been forced into a lot of creativity and changes in tactics since the entire credit implosion debacle began. Citigroup was a horribly mismanaged company during the later phases of the credit bubble and put on enormous risk in its later phases, when risky assets were already ridiculously overpriced. Citi was clearly too big to fail.

Many have talked up the risks to the US economy due to the two-month transition period between presidents and lack of action until Obama takes the reigns, and it appears that Bush and Obama are trying to address this - Obama with a stimulus package on the order of $500 billion designed for signing on the day he goes into office and signals that plans to raise taxes on the wealthy will be delayed, and Bush's man Paulson now indicating that he will swing into action with the second half of the TARP rescue fund after signaling as recently as last week that he was going to leave these funds for the next administration to deal with. Paulson's plan will supposedly try ease household borrowing and further stem foreclosures, though there were no specifics. The negative momentum in the data doesn't seem to showing many signs of slowing and we wonder what the employment situation will look like in the retail sector in the US after the Christmas shopping season is behind us, as it is likely that many are retailers are on life support and could look to shut down or slash costs after what is shaping up to be an ugly and cold (literally, with record cold recently in many parts of the US) end of the year for sales.

US equity markets supposedly took heart that the NY Fed governor Geithner was named as Obama's Treasury Secretary, but we wonder whether this was just an excuse for the late Friday rally. Mr. Geithner is considered a key figure in many of the responses brought by the Fed so far in this crisis. It makes eminent sense that Obama chooses someone from the Fed rather than from the financial services industry, as no bank has remained untainted in this crisis.

Anything to like about GBP?

UK Chancellor Darling is expected to announce an emergency budget today at the so-called pre-budget report today, with new measures including a temporary reduction of the VAT from 17.5% to 15.0%. Other measures are also on the table, but the FT is also reporting that Darling is also out talking up tax increases on the wealthy, so the signals are a bit mixed. One potential bullish development for GBP was a story out Friday about a potential tax change on corporate taxes in the UK that could see massive repatriations of overseas profits. This is a story worth watching, especially as GBP has been the punching bag of the G7 and any new positive spin on the pound could really shock market positioning.

Gold and EURUSD

Gold jumped to life on Friday with an enormous $50+ rally after weeks of range trading. This happened on a day when, although equities posted new lows, the fixed income market was actually rangebound and selling off on the day. The headlines suggest that the gold rally was about safe haven buying, but we wonder if significant participants out there - central banks, namely - may have lost interest in the USD at less than 1.2500 in EURUSD for now and some may be looking at gold as a better perceived way to preserve value. This is a development worth watching. It certainly feels that EURUSD is at a crossroads after range trading in a shrinking range lately: it has lost steam to the downside as the normal association with risk aversion has failed to hold over the last week. Let's see if we get a follow up move and close above the 21-day SMA, which would seem to trigger a large consolidation, possibly as high as 1.3400 if 1.3000 falls. Until then, the outlook is nominally negative, it's just that bears might want to wait for the bottom of the range to give way at 1.2400/1.2330 before feeling any confidence that the chips will fall in their favor.

What next for FX?

If we are seeing a wider attempt at a little risk appetite here in FX-land, then we might look for the likes of GBPUSD and AUDUSD to perform best to the upside. CHF seems to be struggling as well, and if investors don't duck into risk aversion mode again, EURCHF and GBPCHF could follow through higher still after initial attempts through key moving averages.
A follow up move higher for these crosses could signal a further capitulation by remaining CHF longs out there. As the levels stand at the moment, however, we are still in limbo in many of the key pairs: surely we get a signal early in the week here on whether we consolidate further to a weaker USD and JPY or whether we are headed for another wave of follow up action on existing trends.

Published on  Mon, Nov 24 2008, 08:02 GMT

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