Saturday October 4, 2008 - 17:15:27 GMT
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FX Blog - Weekend Thoughts
As posted on GVI Forex
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Jay 12:11 GMT October 4, 2008
I think we are in the end game on the liquidity squeeze, even if it is
a drawn out game. The Treasury and Fed are throwing the kitchen sink at
the market. The Fed can now pay interest on bank reserves so no need
for banks to hoard cash, and will allow the Fed to act as an
intermediary between banks if I read this right. The Treasury will soon
be taking some of the illiquid assets off bank books. A bidding war for
Wachovia and Wells willing to take it on without pre-conditions may be
an anomaly or a sign that the severe financial market panic is finally
This is like digging out after Katrina.. It is a slow process to get
basic services working again and the result is a different world than
before that devastating storm.
What does this suggest? It is very complicated to answer. Europe is a
mess and hasn't even started to deal with its issues. Assuming a U.S.
financial market Armageddon risk eases, then focus shifts to the real
economy. In this regard, expectations are rising for a Fed rate cut.
The ideal response would be coordinated rate cuts. The sticking point
is whether the ECB would go along or act on its own timetable. History
suggests the latter. ECB is so far behind the curve, still focusing on
inflation when deflation has become the greater risk.
As for the dollar, logic suggests it needs a breather after such sharp
moves. Logic also suggests that if liquidity pressures ease, demand for
dollars should also ease. On the other side, there is no safe place to
hide as focus shifts to a slowing global economy.
As for eur/usd, current range is around 1.37-1.39 but 200 pips is too
tight a range to last long. Refer to SF's week ahead post for a
scenario to watch.
Have a good weekend.
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