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Saturday November 22, 2008 - 02:10:34 GMT
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Forex Research - Market Soars on Obama Cabinet Picks

Market Soars on Obama Cabinet Picks Last Updated 11/21/2008 5:08:01 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( +343 pips or +5.99%)

NZD/JPY ( +259 pips or +5.30%)

CAD/JPY ( +307 pips or +4.25%)

THE STORIES IN THE CURRENCY MARKET

  • USD: Market Soars on Obama Cabinet Picks
  • GBP: UK to Officially Hop On the Recession Band Wagon
  • EUR: Weak Data Forces ECB to Talk Rate Cuts
  • CAD: Canadian CPI Drops the Most Since 1949
  • AUD: Soars on Equity Market Recovery
  • NZD: Rises 5.3% Against the Yen
  • JPY: How Much Further Can Stocks Fall

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

US DOLLAR: MARKETS SOAR ON OBAMA CABINET PICKS

On a day when the market had nothing to be happy about, the leak of President-elect Barack Obama’s Cabinet announcements has erased one major uncertainty for the financial markets, sending equities and currencies soaring. The NY Times reported that Hillary Clinton has accepted the post of Secretary of State and NBC reported that Timothy Geithner will be named Treasury Secretary. None of these reports have been officially confirmed by Obama, but he is expected to announce his economic team on Monday.

Timothy Geithner Needs to Hit the Ground Running

When compared to the vast experience of Lawrence Summers and Paul Volcker, Geithner is definitely the more spirited choice. In order to command the same respect that Summers and Volcker may have instantly received from Wall Street, Geithner will have to hit the ground running at an unusual pace to reassure investors. The benefit of choosing Geithner is that he has been intimately involved with the current financial crisis from Day 1 and is speculated to have been the architect behind some of Paulson’s announcements. With Geithner, there will be continuity and no need for any major transitions. In order for the financial markets to hold onto their gains, Geithner will have to work with Paulson and Bernanke immediately to figure out the best ways of using the second half of the $700B bailout package.

Timothy Geithner has been serving as the President and Chief Executive Officer of the Federal Reserve Bank of New York since 2003. Up until the latest financial crisis, he has been relatively unknown especially when compared to Summers and Volcker. However he has been instrumental in helping Hank Paulson resolve the current financial crisis by brokering the JPMorgan Chase acquisition of Bear Stearns. Later on he called for overhauling the regulation in the financial industry, been intimately involved in the government’s decision to let Lehman Brothers fail and played a key role in the dispute between Citigroup and Wells Fargo over Wachovia.

Geithner is also a protégé of Lawrence Summers and has been involved in the bailouts of Brazil, Mexico, Indonesia, South Korea and Thailand in the 1990s as the Undersecretary of the Treasury. He is a global central banker having lived in Asia and the US. Geithner is credited with warning Wall Street Banks in 2006 and 2007 to figure out what would happen to their portfolios if one their main competitors failed. He was worried about the smoke and mirrors that complex credit derivatives can have on balance sheets. Geithner’s only shortfall is that he has worked too closely with Paulson in resolving the current financial crisis which has both strong supporters and critics.

Bracing for a Major Decline in GDP

With no US economic data released today, the market was focused on the speculation of the possible break-up of Citigroup. CEO Vikram Pandit squashed the speculation mid day when he told employees that he does not plan to sell parts of the company but there are still rumors that Citi may make a big announcement next week. Citi’s shares have plummeted with its market capitalization falling from $274B at the end of 2006 to $21 billion this afternoon. Although we are also relieved to hear Obama’s Cabinet picks, a lot of economic data will be released in the coming week including growth, housing market and spending data. Traders should brace for a major decline in GDP that should drive the US economy into an official recession. Although a confirmation of a recession should be very negative for a currency, the fact that the Eurozone, New Zealand, Japan, Mexico and Singapore are already in a recession, makes a US recession less remarkable.

Be cautious of the rally in equities and currencies because in terms of the economic outlook, nothing has changed yet. However, over the past week, the market was very disappointed to learn that the Bush Administration will not tap the remainder of the $700B bailout fund and now there is hope that the gears may start moving once again.

GBP/USD: UK TO OFFICIALLY HOP ON THE RECESSION BANDWAGON

Like the US, the UK will be releasing third quarter GDP numbers next week and it is all but certain that they will be officially hopping on the recession bandwagon. The government has already openly admitted that the country is in a recession and the lagging GDP numbers should confirm that. The British pound has sat at 6 year lows this past week as the minutes from the most recent monetary policy meeting reveals that more interest rate cuts are to come. There is a decent chance that we will see another 100bp rate cut by the Bank of England meeting next month, which would take interest rates to 2 percent. In fact, early December will be a busy month as almost every major country will be announcing monumental policy decisions. The only reasons why the British pound recovered today is the sharp rally in equities and the lack of economic data. Since a recession is already priced into the market, the reaction in the pound may be limited. Don’t forget that next week is Thanksgiving Holiday in the US, which means that most traders will be taking off Wednesday afternoon. This could lead to unusually quiet trading.

EUR/USD: WEAK DATA FORCES ECB TO TALK RATE CUTS

The Purchasing Managers Index continues to pile on the bad news for the Eurozone, as activity in the services and manufacturing sectors weaken substantially. The persistence of such disappointing news shifts all attention to planned ECB policy action for the meeting in December. In fact, ECB President Jean-Claude Trichet made statements today that indicated there is no reason to expect that the central bank will hold things unchanged. In addition, other board officials signaled that the ECB still has plenty of ammunition in the rate cutting arena as the target rate currently hovers at 3.25%. In fact, compared to yields in the U.S., the ECB will have significantly more monetary flexibility. Other reports today indicate that French Consumer Spending has fallen substantially, while Italian Retail Sales show some surprising strength. Monday will reveal the EZ Current Account along with German IFO. Business confidence should suffer from the downturn in the overall economy. On Tuesday we will see German GDP and the French Business Confidence Indicator. German CPI is expected for Wednesday, while Friday we have French PPI and Eurozone CPI. These reports should give further indication as to how aggressive the ECB will be at their December rate decision meeting.

USDJPY: NO RATE CUT FOR BOJ

The Japanese Yen crosses have soared on the heels of the sharp rally in US equities. The markets have something to be optimistic about and that is translating into a recovery in risk appetite. The Bank of Japan voted unanimously to hold the bench mark rate of the interest rates at 0.30% last night, which was in line with the market’s projections. Unless the BoJ wants to return to ZIRP, they have no room to ease interest rates. Japan’s central bank is expected to pump more liquidity into the economy as the recession deepens and exports take a bigger hit. Toyota Motors has already announced that they will slash 3,000 jobs as demand slows. In order to stimulate some sort of spending by Japanese consumers, Prime Minister Taro Aso pledged to give a refund of 12,000 yen for single households. In the coming week, the big day in Japan is their Friday, our Thursday when manufacturing PMI, the jobless rate, consumer prices, industrial production and retail sales are due for release.

USD/CAD: CANADIAN CPI DROPS THE MOST SINCE 1949

The Australian, New Zealand and Canadian dollars recovered nicely today as the Dow Jones Industrial Average Soars close to 500 points. Commodities also made significant rallies as oil reemerges above $50 and gold rises by more than 6%. Canada reported a 1.0 percent drop in consumer prices, the largest decline in 59 years. This report is a direct confirmation of BoC Governor Carney’s concerns that price pressures and growth will slow severely in the coming months. We expect the Bank of Canada to cut interest rates by another 50bp next month and for talk of deflation to surface. In the coming week, the most important release for Canada will be retail sales on Tuesday. For the AUD/USD, it would be a stretch to associate today’s gains with the recent RBA intervention. A successful indication for the action will probably not be felt for awhile. No truly important Australian economic releases will be expected in the coming week. New Zealand on the other hand has trade data on Wednesday.

EUR/JPY: Currency in Play for the Next 24 Hours

The currency in play for the upcoming Monday will be EUR/USD based on the release of Euro zones Current Account Balance and German IFO survey which are due for release at 9:00AM GMT or 4:00AM EST.

The Euro appreciated against the greenback today, as investors are expecting the Fed to cut its interest rates in the near future. Bollinger Bands have narrowed significantly, reflecting the range trading conditions in the EUR/USD, but we still see a clear falling wedge formation. The Euro came close to test the October 28th lows at the price of 1.2328 today, which now represents a key support level, before gaining strength and ending higher. If the long-term support is broken, we can potentially expect a substantial sell-off in the Euro. A perfect order of moving averages still shows negativity in the pair. Nevertheless, a bottom of the falling wedge has proved to be an important support during its formation which holds at 1.2430. The resistance for now is at the top of the wedge, which is also a 10-day SMA at the price of 1.2730. The break of the falling wedge in either direction, will most likely originate a new trend for the pair. The German IFO report could be the potential trigger.

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

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 Kathy Lien 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 Kathy Lien 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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Amazing Trader EVENT RISK Calendar:

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12:30 US- Housing Starts & Permits
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08:30 GB- Retail Sales
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Fri 20 Oct
12:30 CA- Retail Sales & CPI
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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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