Monday September 15, 2008 - 15:35:09 GMT
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GCI Financial - www.gcitrading.com
Forex Market Commentary and Analysis (15 September 2008)
The euro moved lower vis-Ă -vis the U.S.
dollar today as the single currency
tested bids around the US$ 1.4085 level and was capped around the $1.4480
level. Trading was quite volatile as
traders reacted to the bankruptcy of U.S.
investment banking giant Lehman Brothers, a 158-year old firm that failed to
secure emergency funding from the U.S. government or find a buyer
this weekend. The U.S. government
concluded the financial markets had ample time to prepare themselves for a
possible Lehman failure and did not want to jeopardize taxpayer funds through a
bailout. Other news over the weekend
included Bank of Americaâ€™s agreement to purchase Merrill Lynch and AIGâ€™s
massive restructuring effort. The
biggest issue on policymakersâ€™ and tradersâ€™ minds involves systemic risk and
contagion. The common currency gained
ground overnight on the premise that Lehmanâ€™s failure could lead to the
failures of other financial institutions in the U.S. Traders later bought the U.S. dollar back,
however, on the notion that financial strains may be felt overseas including
possible bank failures in the eurozone. An announcement that several of the worldâ€™s
largest banks established a US$ 70 billion borrowing facility to bolster worldwide
liquidity also led to the greenbackâ€™s turnaround. The
appreciable strains in the U.S.
financial system may also result in an unanticipated move by the Federal Open
Market Committee tomorrow. Some traders
are speculating the FOMC may reduce its federal funds target rate by 25bps in
response to ongoing problems in the U.S. financial sector. The fed
funds market is pricing in about an 80% chance the Fed will cut rates
tomorrow. The Fed announced yesterday
that it was broadening the types of collateral that could be pledged at the
Primary Dealer Credit Facility and Term Securities Lending Facility. Data released in the U.S. today saw
August industrial output fall 1.1%, the largest decline since September 2005,
while capacity utilization fell to 78.7%, the lowest level since October
2004. Other data released in the U.S.
today saw the New York Federal Reserve Bankâ€™s Empire State manufacturing index
fell to -7.31 in September. In eurozone
news, EMU-15 labour costs moderated in Q2, rising 2.7% y/y, down from 3.5%
in Q1. European Central Bank President
Trichet today said â€śthere is no place for complacency, but for permanent
credible alertness.â€ť Euro bids are cited
around the US$ 1.3840 level.
The yen appreciated
sharply vis-Ă -vis the U.S. dollar today as the greenback tested bids around
the ÂĄ104.50 level and was capped around the ÂĄ106.90 level. Technically, todayâ€™s intraday low was below
the 38.2% retracement of the move from ÂĄ95.70 to ÂĄ110.65. The yen scored major gains across the board
as traders worked feverishly to reduce their exposure to foreign asset markets
on account of Lehman Brothersâ€™ bankruptcy, AIGâ€™s restructuring, and Merrill
Lynchâ€™s quick sale to Bank of America. Yield-hungry
traders were forced to unwind some short yen carry trades in which they invested
proceeds in higher-yielding investments overseas and this unwinding led to a
major appreciation in the yen. Bank of
Japanâ€™s Policy Board convenes early this week and is not expected to change the
overnight call rate from 0.50%. U.S.
dollar bids are cited around the ÂĄ102.45 level. The
euro moved lower vis-Ă -vis the yen as the single currency tested bids
around the ÂĄ148.55 level and was capped around the ÂĄ152.90 level. The
British pound and Swiss franc came off vis-Ă -vis the yen as the crosses
tested bids around the ÂĄ187.25 and ÂĄ93.55 levels, respectively. In
Chinese news, Peopleâ€™s Bank of China reduced interest rates overnight,
cutting its benchmark one-year lending rate by 27bps to 7.20% - the first cut
in the key interest rate since February 2002.
Data last week showed consumer price inflation slowed to 4.9% in August
from 8.7% in February. Also, commercial
banksâ€™ reserve requirements were reduced by 1.00% to 16.5%, effective 25
The British pound depreciated
vis-Ă -vis the U.S. dollar today as cable tested bids around the US$ 1.7765
level and was capped around the $1.8125 level.
Cable gapped higher at the Australasian open and sank during the
European session before North American players took it higher. Sterling
reacted to the collapse of Lehman Brothers and U.K.
regulators are assessing U.K.
financial institutionsâ€™ exposure to the failed institution. CBI reported the U.K. economy is falling into a
recession. Many traders believe Bank of
Englandâ€™s Monetary Policy Committee will reduce interest rates at least once
before the end of the year. Cable bids
are cited around the $1.7605 level. The euro moved lower vis-Ă -vis the
British pound as the single currency tested bids around the â‚¤0.7910 level and
was capped around the â‚¤0.8005 level.
The Swiss franc appreciated vis-Ă -vis the U.S. dollar today as the
greenback tested bids around the CHF 1.1055 level and was capped around the CHF
1.1280 level. Technically, todayâ€™s
intraday low was right around the 50% retracement of the move from CHF 1.2475
to CHF 0.9645. Data released in Switzerland
today saw August producer and import prices rise 4.0% y/y and decline 0.5%
m/m. Also, July retail sales were up
6.2% y/y. Swiss National Bank is not
expected to change interest rates on Thursday.
U.S. dollar offers are cited around the CHF 1.1430 level. The
euro and British pound moved lower vis-Ă -vis the Swiss franc as the crosses
tested bids around the CHF 1.5860 and CHF 1.9970 levels, respectively.
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