The Dollar Gains Momentum on Concerns Regarding European Banks

The Dollar Gains Momentum on Concerns Regarding European Banks
The Usd continued its positive trend across most of the G10 as pessimism builds around the Eurozone and UK economy. The EurUsd dropped over 90 pips finding support at the 1.40 level, while the UsdJpy slid 60 pips to the mid range of 105. The GbpUsd suffered substantial losses with the pair down 135 pips to the high 1.76 price area. Equity markets gave up some of yesterday’s gains with the Dow down over 200pts, and the FTSE marginally lower, off about 5pts. Commodities are mixed with oil and gold prices displaying an inverse relationship. Oil is down nearly 4% at 96, while gold is up about 1% at 880, due mostly to the flight to quality assets in anticipation of the Fed bailout. Bond yields tightened across the curve with the 2yr in 18bps, and the 10yr in 15bps. Concerns surrounding the Eurozone banking sector have sparked a massive selloff in the currency. The govt. and policymakers are in the process of devising a solution to complications in the financial sector, which are similar to the issues we are seeing in the US. Eurogroup Chairman Juncker stated that Europe “Is not in need of a US-Style Bailout, but that they would be prepared to act on banks.” Messages following Juncker’s statement signaling that government will provide full support to banks. UK PMI was released overnight, the reading was the lowest ever recorded at 41. Growth data in the UK is weak, with exports, employment indices, and demand all weaker, contributing to the grim outlook for the UK economy. The downfall of housing and construction, along with tighter credit are likely to deepen the recession. The cable is likely to remain weak until the situation in the region stabilizes, we hold our 3 month target at 1.75. US financial markets remain extremely volatile with the VIX trading back above $40, the Dow has seen several triple digit price swings over the last several sessions. The market is awaiting the outcome of the second attempt for approval of the Fed Bailout bill. Traders and investors alike are mostly on the sideline, which is contributed to the elevated level of volatility. The dollar has taken its own course building serious momentum against the majors, we should look for levels around 1.37 if additional negative news comes out of Europe. Risk Disclaimer: Although every investment involves some degree of risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore if you are considering trading in this market, you should be aware of the risks associated with this product so you can make an informed decision prior to investing. The material presented here is not to be construed as trading advice or strategy. ACMUSA makes a strong effort to use reliable, expansive information, but we make no representation that it is accurate or complete. In addition, we have no obligation to notify you when opinions or data in this material change.
The Usd massive gains were halted slightly in Asian session, as growing optimism regarding the second attempt for a Bailout and banking sector worries plagued the Eur. The FX market witnessed the steepest appreciation of the greenback against the Euro since 1999. When the dust settled, the EurUsd traded from 1.4420 down to 1.4011 (note that after the rescue plan was rejected by congress on Monday the pair had traded up to 1.4570). The massive Usd buying had a spillover effect most significantly witnessed in the Jpy, where even risk aversion buying couldn't keep the pair down, with the UsdJpy trading up to 106.50 Volatility is still the name of the game, with the Wall Street surging higher after Monday's 7% decline. The DJIA closed up 4.6% and S&P 5.27%. The Asian equity markets are trading higher on the positive momentum. However, global interbank interest rates have been climbing, despite the ECB, BoE and Fed all injecting plenty of overnight funds. On a positive fundamental note, the US consumer confidence in September rose to 59.8 vs. 55 exp. Should the US Congress pass the Bailout Plan in some form later this week, we expect the Usd to continue to be on the offensive.Perhaps the strongest argument for the Usd strength is that while a Bailout plan in the US might be difficult to achieve, but it will get passed, it will be nearly impossible for something similar to occur in Europe . Yesterday saw trouble in European financial institutions increase, with Belgium and French governments extending credit and Irish governments guarantee deposits and debt of Irish banks. Unlike the US structure, the ECB has no mechanisms to respond to bank failures and would be hard pressed to develop a contingency plan should events worsen. While Trichet has been busy assisting the financial sectorss we still expect the ECB to hold rates steady at tomorrow's meeting.Even the flow from risk aversion could not hide the fact that Japanese domestic economic conditions are deteriorating. After a rash of negative data on Tuesday, today's BoJ's quarterly Tankan survey for Q3 confirmed deterioration in business conditions. The large manufacturing index fell to -3 from 5, while the large non-manufacturing index dropped to 1 from 10. We expect that when financial markets right themselves and credit condition improve, the Jpy will suffer significantly as recession hits Japan.It goes without saying that today's activity will remain volatile & uncertain. Participants will have one eye on equity markets and the other on the newswires. We will also be watching ADP for trading direction and indication for Fridays NFP.