Finexo Forex Updates

Friday, October 31, 2008

USD and JPY flail for support after Fed cut and FDIC announcement of troubled mortgage aid. US Q3 GDP estimate on tap.

Rally in risk appetite could extend a bit, but new trading range likely to develop soon. BoJ to cut tonight?


  • US FOMC cut rates the Fed Funds Rate 50 bps to 1.00% as expected
  • New Zealand Oct. NBNZ Business Confidence fell to -42.3 vs. 1.6 in Sep.
  • UK Oct. Nationwide House Prices fell -14.6% vs. -14.7% expected

Market Comment:

The USD was pummeled for sharp losses overnight as a market that was apparently overly long the USD rushed for the exits across the board once 1.3000 gave way in EURUSD. The JPY was also weak and EURJPY has consolidated as much as much as 17 big figures from the lows just four trading days ago. The general trigger for the move has been a resilient equity market and signs of risk appetite elsewhere as well. The Fed cut rates 50 bps to 1.00% as expected and Bernanke even indicated that the Fed was willing to cut even further if conditions warranted.

In currency land, EM currencies saw some relief with the Fed's opening of swap facilities to extend Korea, Brazil, Mexico and Singapore some needed relief on USD funding pressures. Possibly adding to the positive vibes yesterday was news of a new effort by the US Treasury and FDIC to employ $500 billion to slow foreclosures on homes by helping those holding troubled mortgages.

Blanchflower singing the blues and whither GBPUSD?

The Bank of England's dove Blanchflower - who must have a hard time not saying "I told you so" from every high spot - was out arguing that rates must come down more quickly as England risks moving into a deflation. This was the guy that turned dovish and warned of severe troubles ahead while every other Bank of England member seemed to focus on the inflation issue to the exclusion of everything else. Chancellor Darling was also out yesterday signaling to the Bank that he would welcome further cuts and not be especially worried about inflation targeting by the bank in the shorter/medium term. The BOE is expected to cut another 50 basis points at their meeting next week and the overnight rate may be a full 100 bps lower by the end of the year with two meeting remaining. Blanchflower would probably like to have it 200 bps lower, but this is unlikely. The GBP has rallied furiously over the last few days, likely mostly due to the bout of risk appetite and extraordinary market positioning. The market simply got too short sterling, and we're seeing a big short squeeze here - the disastrous UK story is all too evident for everyone to see and will continue, but markets often get ahead of themselves. Looking at technical levels in GBPUSD, 1.6790 was the old low and 1.7000 was a structural level that stretches a few years back. But to give an idea of how far we have come, consider that the 55-day moving average is up at 1.7675 still and the 200-day at 1.9180. We would expect the rally to fade eventually - those looking to enter structural short positions might consider shorting call options on rallies, considering the still very rich premium. 1-month vols are still above 25% and 1-week even higher.


Norway's central bank cut 50 bps as the majority of analysts expected. At first, this triggered a bit of NOK appreciation, but later the pair rose again, a bit of a curious development considering the generally risk willing atmosphere elsewhere (lately one would normally associate this with a stronger NOK) and the giant rise in oil prices had. So we can't give the NOK the all clear by any means - though a few minutes after writing this we see Norway coming in and bidding up the NOK to the tune of 10 big figures of downside in EURNOK - a sign of desperately thin liquidity... CAD on the other hand, responded very strongly to the rise in energy prices yesterday. In the bigger picture, although the Canadian economy faces stark difficulties ahead, especially if commodities continue their recent collapse, it has the healthiest fiscal position of any of the G7 countries with the possible exception of Switzerland, so any future USDCAD rally is unlikely to unfold with the same vigor as the one we have seen recently from 1.0350 to 1.3000 unless we move into another all-out panic phase at some time in the future. That said, we would look for support soon in USDCAD, as the pair may carve out a new range. Knife catchers are welcome to go long here below 1.1925, though one may want to wait for a technical recovery sign first as there is still plenty of room for further downside in the short term without threatening the overall rally.

What next?

So, we have a big countertrend rally on here - the question becomes how much more? Our guess is that while it could go a bit further, the markets may begin to carve out a new trading range soon. Find the Fibo's and the round numbers on your favorite cross for spots where resistance may come in. The high in EURUSD overnight, for example, stopped right at the 0.382 Fibo for the sell-off sequence from 1.4865 to 1.2332 (at 1.3293).

On the economic data front, all eyes on the first estimate of US Q3 GDP at 1230 GMT today - with the first negative reading since Q4 of 2007 expected. Q4 GDP will also inevitably be negative and we can finally put the kibosh on all of the talk about whether we have satisfied the technical definition of a recession. (which would have already been fulfilled in Q1 were we using pre-Clinton era inflation calculations)

Tonight, watch for the BoJ rate announcement - as market is now looking for a 25 bp cut after yesterday's press reports. The cut itself means little, but in a context of a rally in risk appetite, it could mean an excuse to push the JPY lower in the short term. This would only provide excellent new entry points to go long the JPY in our view if we look at the bigger picture since we don't expect a return of the carry trade any time soon...

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