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Wednesday October 1, 2008 - 22:55:23 GMT
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Forex Blog - Will the US Dollar Continue to Rise?

Will the US Dollar Continue to Rise? Last Updated 10/1/2008 5:24:06 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( -100 pips or -1.20%)

GBP/JPY ( -192 pips or -1.02%)

EUR/JPY ( -146 pips or -0.98%)

THE STORIES IN THE CURRENCY MARKET

  • USD: WILL THE US DOLLAR CONTINUE TO RISE?
  • EUR: ECB TO KEEP RATES UNCHANGED BU WILL TRICHET FINALLY BUCKLE?
  • GBP: DOWN 5% IN 1 WEEK
  • JPY: BAILOUT PLAN UNCERTAINTY WEIGHS ON YEN CROSSES
  • CAD: WEAK US AUTO SALES COULD HURT CANADA
  • AUD: GOLD PRICES UNCHANGED
  • NZD: GAINS STRENGTH AGAINST THE DOLLAR

EXPECTATIONS FOR UPCOMING FED MEETINGS

 

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

WILL THE US DOLLAR CONTINUE TO RISE?

Hold your breath as trading could become very interesting over the next 24 hours. Compared to the price action in the beginning week, currencies have been relatively tame today as they wait for the Senate’s vote on the revived bailout plan this evening. Take two of the bailout drama should prove to be just as interesting as the first take even though in all likelihood, this version of the bill should be passed by both the Senate and the House because consequences of not doing so for Republicans and Democrats would be severe. Another rejection could mean another 700 point drop in the Dow. The most significant changes include an increase to the FDIC insurance and some tax breaks. If the Senators sell this as a job and bank account rescue plan, it may actually be a palatable solution for Main Street.

Senators Take Aim at the Crisis of Confidence But Will This Be Enough?

Since this is a crisis of confidence, increasing the FDIC insurance from $100,000 to $250,000 would be a huge psychological boost for Americans. It would prevent panicked bank runs by giving customers the peace of mind in knowing that their money is secure. For the FDIC, there is no initial outlay and less bank runs suggests less of need for them to dig into their pockets. For banks, the rest of the bill remains pretty much intact which means that the US government will still be buying up their troubled debt. The big question is – will this be enough to unfreeze the credit markets. As we have seen on Monday when the markets opened, investors were not convinced that the $700B bailout plan would do the trick. Both US stocks and USD/JPY were sold long before the market caught whiff of the House’s rejection. Therefore it still remains to be seen whether the markets will have a positive reaction to the new bailout plan.

The Tale of 2 Dollars

Even though the US dollar continued to weaken against the Japanese Yen it rallied for the seventh consecutive trading day against the Euro. We have a tale of two dollars here where the market’s sentiment about the outlook for the US economy is reflected in USD/JPY while the price action of the EUR/USD is based upon who has the greater systemic risks going forward – the Eurozone or the US. We expect the dollar to continue to rise against the Euro as the ECB starts talking about cutting interest rates but it should remain weak against the Japanese Yen. However in the short term, the fate of USD/JPY is tied to the market’s reaction of the bailout plan.

ISM Nears Recessionary Levels, the Pitfalls of ADP

One of the biggest concerns about the bailout plan is its lack of initiatives to spur growth. The latest manufacturing ISM report indicates the severity of the problems in the US economy. The index fell from 49.9 to 43.5, the lowest level since 2001. Sharp declines were seen in the new orders, prices paid and employment components which suggest that the slowdown in the US and abroad has hit manufacturers hard. As for the ADP, unfortunately I do not think there is any reliability to the numbers especially since the report only captures the first 2 weeks of September. This would not be the first time that the ADP has overestimated non-farm payrolls. There is no question that the US economy remains weak and the big drop in the manufacturing ISM index and construction spending confirms that. In addition, all 4 of the big US car manufacturers reported double digit percentage declines in car sales last month.

Warren Buffett Looks for Bargains - Invests $3 Bln Into GE

The only good news today is that legendary investor Warren Buffett is in the market looking for bargains. Last month, he made a $5B investment in Goldman Sachs and now he has invested $3B into General Electric. Even though Warren Buffett has far deeper pockets than all of us, it will be interesting to see if his bargain hunting becomes contagious. The SEC’s short sell ban ends on Thursday but there is a decent chance that the ban may be extended. Although jobless claims and factory orders will be due for release tomorrow, the story will be the bailout plan and the comments from ECB President Trichet.

ECB TO KEEP RATES UNCHANGED BU WILL TRICHET FINALLY BUCKLE?

The Euro is hovering around the 1.40 level ahead of the European Central Bank’s interest rate decision. No expects the central bank to cut interest rates, but now that Eurozone governments have had to bailout 3 financial institutions, Trichet may have no choice but to start talking about cutting interest rates. Many economists on Wall Street have already revised their ECB forecasts to call for a rate cut by the end of the year. In general, Trichet is not a fan of surprises, so if that is his intention, we expect him to prepare the market by adopting a slightly more dovish tone. Although German retail sales were stronger than the market expected in the month of August, manufacturing PMI fell deeper into contractionary territory. There has also been talk about an EU version of the TARP plan today. France wanted a EUR 300B rescue plan for the European financial sector, but other members such as Germany disagreed. Even if the plan does not happen, European governments are becoming increasingly concerned that they will suffer the same fate as the US.

BRITISH POUND – DOWN 5% IN 1 WEEK

In less than one week, the British pound has fallen more than 5 percent or 1000 pips against the US dollar. With just as many troubles as the US, pressure is growing on the UK to either cut interest rates or to guarantee bank deposits. This follows the announcement by Ireland that they will guarantee every penny of customer deposits at Irish owned banks. The UK is dealing with its own crisis of confidence. Banking stocks came under more selling pressure on the fear that Lloyds may pull out of their agreement to save HBOS, the UK’s largest mortgage lender. If this deal does not go through, the consequences for the UK financial markets could be disastrous. Since UK manufacturing PMI plunged by the fastest rate in 17 years last month, we doubt that Thursday’s construction PMI report will fare much better.

UNCERTAINTY WEIGHS ON YEN CROSSES

Uncertainty about the outcome of the bailout plan has weighed on all of the Japanese Yen crosses. These currency pairs have been particularly schizophrenic and for that reason, we would not be surprised to see a material recovery if the Dow takes off tomorrow. Japanese economic data was weak with the Tankan index of business sentiment deteriorating in the third quarter. A slowdown in global growth has turned Japanese businesses more pessimistic.

CANADIAN AND NEW ZEALAND DOLLARS GAIN STRENGTH, AUSTRALIAN DOLLAR CONTINUES TO SLIP

The Canadian and New Zealand dollars held their ground against the greenback as the markets wait for the bailout announcement. The recent strength in the kiwi has been driven by the comments from RBNZ Governor Bollard who downplayed the need for an emergency rate cut. The slowdown in car sales today will certainly take a bite out of the Canadian car industry. The Australian trade balance is due for release this evening along with New Zealand consumer prices.

EUR/USD: CURRENCY PAIR IN PLAY OVER THE NEXT 24 HOURS

With the European Central Bank interest rate decision scheduled for 7:45am ET or 11:45 GMT and Trichet’s press conference at 8:30am ET or 12:30 GMT, the EUR/USD will continue to be the currency in play over the next 24 hours. In Tuesday’s Daily Currency Focus, we called for further losses in the EUR/USD with a possible move down to 1.40 and we are trading at that level right now.

Technically, the EUR/USD is now in the “sell zone,” which we determine using Bollinger Bands. The 1.40 level continues to be important, but as long as the currency pair remains below 1.4176 or Wednesday’s high, there is scope for a test and break of the prior low at 1.3882. If it does break 1.4176 on the topside, resistance does not come in until 1.4400.

 

By Kathy Lien, Director of Currency Research at GFT


DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Me will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Me do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.






 

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