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Forex Research - Fannie and Freddie's Troubles are a Lose-Lose for the US Dollar
â€˘ Euro Within 1 Penny of its Record Highs
â€˘ British Pound: Time for Some Action
Fannie and Freddieâ€™s Troubles are a Lose-Lose for the US Dollar
Calling the financial markets active today is practically an
understatement. The combination of soaring oil prices and problems with
Fannie Mae and Freddie Mac triggered sharp volatility in the equity and
currency market. At one point during the US trading session, the Dow
jumped 200 points within minutes, driving EUR/JPY to a record high. The
market was initially very disappointed by US Treasury Secretary
Paulsonâ€™s reluctance to bailout Fannie Mae and Freddie Mac, but they
were pleasantly surprised by Bernankeâ€™s offer to access the discount
window (The ABCs of Fannie Mae and Freddie Macâ€™s Problems).
However their optimism was short-lived as stocks resumed their slide.
The biggest question in the financial markets right now is whether or
not Fannie and Freddie are too big to fail? If the government stepped
in to prevent the Bear Stearns meltdown from crushing the market, they
will undoubtedly step in to prevent a collapse in Fannie Mae or Freddie
Mac because if either GSE fails, Americans will have to shoulder the
burden. Fed Chairman Ben Bernanke has already announced that the GSEs
can have access to the discount window, which would allow them to
borrow money directly from the Federal Reserve rather than the markets.
If Fannie and Freddie's problems are not solved and they still have
difficulties borrowing, this means that they will have difficulties
lending, which is something that the US government can not risk at this
moment. For the currency market, it is a lose-lose situation for the US
dollar. Further problems at Fannie and Freddie would push stocks lower
once again, which would trigger another flight to safety out of US
dollars. A bailout would essentially double the public debt, risking a
downgrade in the US credit rating. Expect Fridayâ€™s volatility to
continue into the new trading week. We have a very busy US economic
calendar that includes retail sales, producer prices, consumer prices,
the Empire State and Philly Fed manufacturing surveys, industrial
production, the Treasury International Capital flow report, housing
starts and the minutes from the last FOMC meeting. Meanwhile the trade
balance was stronger than the market expected thanks to a rebound in
exports. Consumer confidence also improved modestly but it still
remains near a 30 year low.
Euro Within 1 Penny of its Record Highs
The Euro traded within 1 penny of its record highs on fresh fears that
another major financial crisis may be around the corner. If it wasnâ€™t
for the potential repeat of the Bear Stearns debacle in March, we would
have a quiet summer. However US stocks fell to a new 23 month low today
triggering another flight to safety into anything but US dollars.
Whether the EUR/USD manages to hit a new record high will be less
dependent on economic data and more dependent on how much better or
worse the market feels about the health of Fannie Mae and Freddie Mac.
The latest rally in the Euro helps Eurozone nations deal with the rise
in oil prices but it also raises the risk of sharply weaker growth for
countries other than Spain and Ireland. Like the US, there are a number
of pieces of economic data on the Eurozone calendar that are worth
watching. This includes the German ZEW survey of analyst sentiment,
consumer and producer prices.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound: Time for Some Action
The British pound strengthened against the US dollar due entirely to
dollar weakness. Although the problems with Fannie Mae and Freddie Mac
affect the US the most, the UK will not escape unscarred. Bond yields
have started to trickle higher while the FTSE has plunged alongside the
Dow. In some ways, the UK economy is in as much trouble as the US.
According to the latest data from mortgage lender Halifax, house prices
dropped for the fourth month in a row to the lowest level on record.
More housing market data will be released next week and we do not
expect the current trend to change. The UK will be reporting consumer
and producer price growth along with their employment numbers for the
month of June. Inflationary pressures are expected to grow, but the
outlook for the unemployment numbers are mixed. Even though the labor
conditions in the service sector improved last month, conditions in the
manufacturing sector deteriorated.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Big Week Ahead for the Canadian and New Zealand Dollars
Of the three commodity producing currencies, the Australian dollar was
the marketâ€™s biggest focus this past week. Not only were employment
numbers released, but currency pair soared to a new 25 year high this
morning. A move above the August 1982 high of 0.9905 would mark a 26
year high for the currency. Next week, the currency marketâ€™s focus will
shift to the Canadian and New Zealand dollars. The Bank of Canada has a
monetary policy decision. Although they are not expected to alter
interest rates, watch out for any market moving comments from the BoC
Governor. New Zealand on the other hand has retail sales, service
sector PMI, and consumer prices due for release. Given the sharp drop
in consumer and business confidence, we expect the data to be kiwi
bearish. The divergence in economic activity between Australia and New
Zealand has driven the exchange rate of AUD/NZD to a new 7 year high.
Tell us what you think on the Canadian dollar Forum.
EUR/JPY Hits Record High
Japanese Yen crosses have had a varied reaction to the volatility in
the Dow today. USD/JPY and CAD/JPY came under aggressive selling
pressure, while EUR/JPY and CHF/JPY are higher. This tells us that
traders are just selling US dollars and not all risky assets. Depending
on which Yen crosses that you buy, the carry trade could still be
working. EUR/JPY hit a new record high, which is a trend that we have
seen often. When the Dow first broke the Bear Stearns low in late June,
EUR/JPY also rallied to a new high. Looking ahead, the Bank of Japan is
expected to leave interest rates unchanged at 0.5 percent as the
economy continues to suffer.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
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