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Forex − Market worries on Deficit implications of the $700bio Bailout

Tue, Sep 23 2008, 10:13 GMT
by Peter Rosentreich

ACM - Advanced Currency Markets

Forex News and Events:

The Dollar tumbled, hitting multi-week lows against the Euro and against Sterling on Monday as the US government's bailout plan to ease a financial credit crisis reignited worries about the country's massive budget deficit.

The $700bio package, which is awaiting congressional approval, would give sweeping powers to the US Treasury to buy mortgage-related bad debts from financial firms, including US subsidiaries of foreign banks. But analysts say foreign investors will be increasingly reluctant to finance the growing US deficit at the current Dollar exchange rate and that funding the gap would require higher interest rates and a weaker currency. The Congressional Budget Office has forecast a record US budget shortfall of about $438bio in the next fiscal year, excluding the cost of the bailout. The rescue package is expected to raise the government's debt ceiling 6.6%.

Yesterday EurUsd was trading at three-week highs of 1.4867, up 2.5 on the day at 1.4801. GbpUsd climbed as high as 1.8641. It was last trading at 1.8568, up 1.38%. UsdChf fell 2.76% to 1.0747. UsdJpy dropped 1.86% to 105.45.

Analysts also raised questions about the ultimate form of the government's proposed $700bio solution to the credit squeeze and how the illiquid and damaged assets held by banks will be valued and taken onto the government's books. Some analysts, however, lauded the US government plan, saying they believed that the Treasury had to act to prevent worsening turmoil in financial markets.

Today's Key Issues (time in GMT):

00:00 September Nationwide HousePrice -1.6% vs -1.9% (mom)
00:00 EUR September Nationwide HousePrice -12.4% vs -10.5% (yoy)
06:45 EUR July Consumer spending 0.4% vs -0.4% (mom)
06:45 EUR August Consumer spending -0.3% vs 0.4% (mom)
08:00 EUR September Euro-zone Markit Comp Flash PMI 47 vs 48.2
08:00 EUR September Euro-zone Markit Mfg Flash PMI 45.3 vs 47.6
08:00 EUR September Euro-zone Markit Serv Flash PMI 48.2 vs 48.5
09:00 EUR July Euro-zone New orders -0.7% vs -0.3% (mom)
09:00 CAD July Euro-zone New orders -3.7% vs -7.4% (yoy)
11:00 CAD August CPI BoC Core 0.1% vs 0.1% (mom)
11:00 CAD August CPI BoC Core 1.6% vs 1.5% (yoy)
11:00 CAD August CPI inflation -0.2% vs 0.3% (mom)
11:00 USD August CPI inflation 3.5% vs 3.4% (yoy)
14:00 Paulson, Bernanke testify on credit turmoil at Senate Panel

The Risk Today:

EurUsd Market recovered yesterday up 2.32% to 1.4867 from 1.3882 three-week low. On the current upside, only a return over 1.5000 and 1.5500 will release actual pressure and may put key initial resistance 1.6000 into focus. Still a break up there would open the way to Trendline resistance 1.6200. But renewed weakness below 1.4250 will put the focus on strong support 1.3666 December 2004 high and 1.3056 support (retracement of 0.8231 – 1.6039 advance).

GbpUsd Cable posted 1.7447 low two weeks ago. It rose 1.38% yesterday to 1.8568 breaking up last week 1.8387 high. On the upside, strong resistance holds 1.8795 21st August high. Former support 1.9363 holds also strong resistance. Key level holds 2.0100 resistance. Renewed weakness below 1.7447 may find support on 1.7422 (50% retracement of 1.3682 – 2.1161 advance). Strong support holds 1.7251 3rd April low.

UsdJpy Last week strong volatility posted 104.20 to 106.20 consolidation range before recovery to 108.02 Friday high and initial resistance. Further advance will put 110.67 15th August high. Renewed pressure below 105.88 initial support may open the way toward 105 pivot (38.2% retracement of 95.75 – 110.67 advance), as well as 103.54 last week low and 100 pivot point.

UsdChf Market rose as high as 1.1418 two-weeks ago and strongly reversed 1 ½-month uptrend last week. High volatile Friday session posted 1.1280 high initial resistance and 1.1007 low. On the downside, only weakness below 1.0734 former resistance would undermine the current trend and open the way down to 1.0500 and 1.0375. This move could also test the 1.0013 15th July low in front of 0.9637 17th March low. Initial resistance holds 1.1280 Friday high ahead of 1.1418 11th September trend high. Strong resistance holds 1.1593 December 2007 high.

Resistance and Support:

Published on  Tue, Sep 23 2008, 11:18 GMT