Panic liquidation consumed currency trading at the start of the week as the news that Bear Stearns was being sold to JP Morgan Chase for a mere $2/share sent shivers through global capital markets
â€˘ Japanese Yen: Yen drops to 95.70 low on panic liquidation
â€˘ Euro: Bursts to 1.5900 before profit taking kicks in
â€˘ Pound: Weighed by risk aversion flows but bounces back to above 2.0200 EURGBP hits 7915
â€˘ US Dollar: TIC s on tap
Panic liquidation consumed currency trading at the start of the week as the news that Bear Stearns was being sold to JP Morgan Chase for a mere $2/share sent shivers through global capital markets with investors fearing that other major US financial institutions may be facing the prospect of bankruptcy.
The acquisition of Bear by JPMC, which was initially received positively by the FX traders, precipitated massive selloffs in USDJPY when investors found out that the deal valued Bear Stearns at a miniscule $236 million against its Friday closing price of $3.5 billion. Furthermore, the deal included a provision in which the Fed guaranteed $30 billion in financing to JPMC to complete the transaction. In short the Bear Stearns acquisition was a bailout in disguise resulting in an absolutely stunning turn of fortune for the 5th largest US securities firm that only six months ago was valued at more than $10 billion.
The concern amongst currency traders is that Bear will not be the sole victim on Wall Street of the disastrous blow up in the asset backed fixed income market, with many viewing Lehman and Citibank as possible candidates to disclose further balance sheet problems on their books. In short risk aversion reigned supreme as capital markets opened up for trade this week with USDJPY dropping all the way to 95.70 in early Asia session in incredibly volatile trade that continues to see seesaw moves of 50 to 100 points every 15 minutes.
The violence of todayâ€™s price action has been so severe that some dealers fear a coordinated intervention by G-3 central banks the purpose of which may not be necessarily to prop up the dollar but simply to slow down its descent. While ECB officials have been characteristically tight lipped Japanese Finance Minister Nukaga and Vice Fin Min Shinohara both noted that the FX moves have been excessive, perhaps trying to signal to the markets the official concern over the one way moves.
Lately, currency markets have been skeptical about the prospect of intervention by BOJ given the fact that Japan is hosting of G-7 this year. However, the price action over the past several days has been so extraordinary, that many traders feel that Central Banks will have no choice but to respond if the selling continues. We believe that ECB may be the crucial player in this scenario. The Europeans have absorbed the vast majority of adjustment in exchange rates differentials both against North America and Asia. Therefore, if Mr. Trichet signals to the market that the moves have been â€śbrutalâ€ť as code word that he used last time EURUSD catapulted more than 10% in a matter of months, the prospect of central bank intervention may become real. Until such time, there appears to be nothing on the economic horizon to relieve the panic that pervades the currency market right now. In fact todayâ€™s TICS data could only exacerbate fears of a dollar collapse if it shows further declines in capital inflows into US.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]