US Dollar at slower pace against shining commodities

Week Dollar

The USD was weaker again overnight as the fate of the auto-bailout package suddenly became less certain. The $14 billion dollar aid package was passed in the House, but it is unclear whether the Senate will be able to muster a majority vote and at least one Republican Senator was threatening a passage-blocking filibuster attempt. From our view, the package doesn't really look at the real long-term problem at hand: the legacy costs that will always weigh on the US automakers relative to their foreign competitors. The so-called prepackaged bankruptcy options seemed better and far less intrusive than the current plan. The plan's idea of appointing a "car czar" and taking partial government ownership smacks of dirigisme and might only make things worse in the long run.

Commodities were higher

We're not sure why the market is getting so upset about the auto-bailout package, but clearly it is clouding the market's view on the USD right now and could continue to do so in the days to come until the issue is resolved. Other factors were also important in the move weaker for the USD yesterday. Commodities jumped higher yesterday, with gold especially on the move as it sliced through key resistance around the 800 dollar/oz. level and looks ready for more. A bit surprisingly, relative to recent patterns, the weakness in equities in the US Session failed to provide convincing support, so this divergence, in addition to technical breaks in places overnight, raises the probability that the USD sell-off may gain further legs in the short term - see more on this below.

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Finexo Market news and Recommendations

• FX: CHF and JPY retreating after the rescue/bailout of AIG and the FOMC decision to keep rates at 2%. USD edging higher.

• Fixed Income: 10-years trading in big ranges, directionless.

• Stocks: US and APAC sessions +1% higher. Europe stock are down by 2-3%.

• Commodities: Crude Oil finally seeing some buying interest. Precious metals are consolidating.

• The markets are enjoying a broad based relief rally from the Fed assistance package that has been granted to AIG, the largest insurer by assets in the US. Considering the large potential implications of a the insurance company’s failure, Federal Reserve has decided to lend AIG $85B in return for a 80% share in the company stock, effectively nationalizing the firm.

• While leaving the policy rates unchanged at 2%, the US central bank can now be observed to focus increasingly on targeted, emergency short-term loans instead. The bank has also changed its general collateral policy, as it now allows securities firms to use stock holdings as loan collateral.

• The general rally in equities and carry trades also looks to extend to crude, with the oil prices rebounding from the steepest decline in 4-yr period. The oil prices have already seen a near 39% drop from the highs reached this year and have so far found support just above the $90 mark.

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Todays forex Updates

• FX: EURUSD sustains below the 100 weekly SMA currently at 1.4208, but slowly starts to look soft with heavy bids around 1.4050. Carry trades well supported in Asia despite risk aversion in equities.

• Fixed Income: Bunds made a strong comeback yesterday, also supported by weak US home sales and flight to safety. Losing momentum in Asia though with JGB’s on debt issue speculation.

• Stocks: European session generally down 0.5-2.0%, looking to re-establish downturn trend. Ugly day in the US on Lehman worries. Indexes down 2-3.4%. Asia not taking that big a hit on bullish China numbers. Nikkei down 0.4%, Hang Seng 1.6%.

• Commodities: Metals lower with both gold & silver taking out key support levels, however, gold not managing a follow-through. Oil slightly higher in Asia.

• In a move that surprised the markets, OPEC has agreed to an output cut. The change would see the production effectively being curbed by half a million barrels a day. Before the decision, the oil prices had seen 5-month lows, or about 30% below the peak prices of this year. OPEC
had been expected to keep production levels unchanged but has instead taken on a more price defensive posture.

• In overnight trading, the Asian stocks have added to previous session’s losses as weak demand factors are now reinforced by sliding metals prices, hurting the large resource producers.

• As the stock price of Lehman Brothers continued to slide with no result from the talks it had held with Korea Development Bank, the firm has come under growing pressure to find a way out of its troubles. The markets will be keenly observing as the bank will be announcing its Q3 results before the US opening today, a week earlier than planned.

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