The flight to safe assets continued in the NY session as investors shunned equities and bought heavily in US Treasuries.  US stocks plunged -4.7% in broad terms, led by an -8.9% drop in financial stocks.  Treasuries meanwhile caught a major bid as the 2-year note shed -16 basis points towards 1.64% and the 3-month bill dropped a staggering -65 bps to a measly 0.04% yield.  The result was sharply lower JPY crosses as USD/JPY fell roughly -125 pips to 104.65 and EUR/JPY slipped -50 pips into the 149.85/90 zone.   The continuous unwind of carry trades was ostensibly the flavor of the day.

EUR/USD caught a nice bid about midway through NY trading as speculation that the Fed may step in and cut rates prevailed.  The futures market is now pricing in 92% odds that the Fed cuts -25 bps by the October 29 meeting -- up from 62% odds yesterday.  Euro fell to a session low near 1.4100 before rallying more than 125 pips into the 1.4325/30 area at the close.  Fundamentally, the risk from the current credit market turmoil effects Europe in much the same way as the US and thus we would not anticipate continued Euro strength based solely on the recent events.

Cable saw the greatest of the gains in NY trading as news that a UK merchant bank is buying one of the largest UK mortgage lenders was viewed especially positive.  GBP/USD rocketed more than 300 pips and closed near the 1.8175 level.  Given the continued deterioration in UK economic fundamentals, however, this latest move is likely overdone.  We would expect a break below 1.8110/00 to see weakness resume into the 1.7950 area.

The focus in Asia is not likely to be on economic data, but rather the goings on in equity markets and potential follow-through from the pummeling of US stocks.  Traders should be nimble in JPY crosses as the stock market volatility will undoubtedly make for some wild price action.


Upcoming Economic Data Releases (Asia Session):

  • 9/17/2008  23:50 GMT JN Tertiary Industry Index (MoM) JUL 0.40% -0.80%
  • 9/18/2008  1:00 GMT AU Westpac-ACCI 3rd-Qtr Survey of Industrial Trends 18-Sep 
  • 9/18/2008  1:30 GMT AU RBA Foreign Exchange Transactn AUG - - A$300M
  • 9/18/2008  5:00 GMT JN BOJ Monthly Report 17-Sep 
  • 9/18/2008  5:30 GMT JN Tokyo Dept. Store Sales (YoY) AUG - - -0.90%
  • 9/18/2008  5:30 GMT JN Nationwide Dept. Sales (YoY) AUG - - -2.50%