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Henry Paulson fails to add confidence to markets

Wed, Nov 12 2008, 15:01 GMT
by James Whyte

ForexAmericas  |  View company's profile

Market Update

Once again, we see weakness across the board.  The Asian and European markets closed down 1-3%, and the Dow followed, closing down 4.6%, led by financials and commodity stocks.  Citigroup was down 10%, and that sparked a further sell off in the Dow toward the end of the session.  The Nasdaq closed below October’s low, which also helped spark a further sell off.  GM was the only Dow component to gain today.  More and more analysts are comparing these conditions to the Great Depression, which will only serve to spark more weakness in the days ahead.  Oil also continued its slide, down 5% on the day.  Henry Paulson did not add any confidence when he announced the diversion of some of the bailout money from financials to consumers, planning to use some of that money to relieve some of the consumer credit market problems.  This caused the Yen to strengthen as more investors renewed their selling of higher-yielding assets. BOE’s King indicated the need for further easing; as the U.K. economy continues its slide (unemployment claims hit their highest levels in 7 years).  King also commented that he did not expect the Pound to come down as much as it did…this leaves us cautious to short the Pound at these levels.

Our Focus Today:

EUR/USD:

The Euro came off overnight, but not nearly as much as Dollar Yen, or indeed the Pound.  We do see continued weakness in the Euro, and would look to sell it in the mid 1.25’s with a stop above 1.2660.  At the close of the NY session, Euro is testing the lows of 2006 at 1.2450.  A break of these levels leaves room to 1.2030.

USD/JPY:

Dollar Yen finally got off its flat line movement, to drop almost 4 big figures from its highs.  We believe it will continue to sell off, and will wait for a retracement to establish shorts.  Dollar Yen tested the low of Oct 28 at 94.45, and bounced significantly.  We look to those levels to establish a short position ahead of 96.00. A break of the 94.45 level should produce 92.60, before a retest of Oct 24 bottom of 90.80.  Through that, we are back to testing the Asia crisis levels (1995), when the USD/JPY hit below 80.00. The EUR/JPY trade we talked about yesterday was nearly perfect (123.50 short to 118.20), and we continue to see Yen strength across the board.  GBP/JPY collapsed much more as both components moved in opposite directions for different reasons.  GBP/JPY tested 1995 lows, and could drop to historic lows of 129.35 (also in 1995, when USD/JPY was at its lowest point).

GBP/USD:

Sterling easily broke previous lows of 1.5260-80 as mentioned yesterday, due to the BOE, and we are cautiously waiting for a good retracement to 1.5065 (highs from the bounce, so far) before getting short again.  We would look to stop out above 1.5160, if we continue to see Cable rise.  EUR/GBP reached new highs, as the Euro did not come down nearly as far as the Pound.  We are careful about that pair, as it has significant P&L impacts.

AUD/USD

Aussie came off with the Pound, and our call yesterday again proved to be correct.  For now, we will watch how the markets in Asia develop, to see how much of a rebound Aussie has in it.  We do not expect it to recover above .6465, and will establish shorts ahead of it.

Published on  Thu, Nov 13 2008, 01:42 GMT

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