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Tuesday November 25, 2008 - 22:33:45 GMT
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Forex Research - USD: Markets Not Content With $800B

USD: Markets Not Content With $800B Last Updated 11/25/2008 5:02:13 PM EST (GMT +5)


AUD/JPY ( -150 pips or -2.34%)

NZD/JPY ( -109 pips or -2.04%)

EUR/AUD (+268 pips or +1.40%)


  • USD: Markets Not Content With $800B
  • GBP: GDP report to post first contraction since 1990
  • EUR: Clears 1.30
  • CAD: Sharp Recovery in Retail Sales
  • AUD: Gold Prices at $821.95
  • NZD: Inflation Expectation Ease
  • JPY: Bank of Japan Worried About Growth





This market has become more and more difficult to satisfy. The US government announced this morning that they will be spending as much as $800 billion to help ease lending for homeowners, consumers and small businesses. With interest rates expected to be decreased to 0.5 percent next month, the Federal Reserve is tapping into unorthodox policy tools. Their announcement was originally cheered by the markets with stocks rising by more than 150 points but equities quickly gave up their gains as the initial euphoria faded. The US dollar on the other hand sold off aggressively following the Fed’s announcement and held onto its losses against the Euro, British pound and Japanese Yen for most of the NY trading session.

Fed’s $800 Billion Announcement Deepens US Funding Crisis

Both the outgoing and incoming Presidents are working overtime on the financial market crisis and this should help to restore confidence. President Elect Barack Obama has formed his Economic Team and is outlining his plans for stimulating the US economy on a near daily basis. The Bush Administration bailed out Citigroup yesterday and has now made a colossal announcement aimed at putting a bottom in the asset market. Although their dual efforts should go a long way in restoring stability in the credit markets, currency traders are more worried about what the plan will do to the Fed’s balance sheet.

The $800B plan which includes the introduction of a new Term Asset-backed Securities Loan Facility will increase the Fed’s balance sheet by 35 percent to more than $3 trillion. Prior to Lehman Brother’s collapse, the Fed had less than $1 billion on their balance sheet. For investors that have been concerned about the funding crisis, this is an even bigger reason to sell dollars. However it is important for those same investors to realize that $3 trillion is only 20 percent of GDP. Japan’s balance sheet expanded to 30 percent of GDP when they implemented quantitative easing earlier this decade.

Here are the key components of the US Government’s announcement:

- New $200B facility to support ABS

- Buy up to $500B in mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae

- Buy up to $100B in direct obligations of housing related Government Sponsored Enterprises

- Treasury will use $20B of TARP funds to provide credit protection to the Fed

GDP Contracts 0.5 Percent, Warning Signs for Q4

US GDP was also released today. Growth slowed by 0.5 percent in the third quarter, which was weakest since 2001. Although the headline number was in line with the market’s expectations, there was a steeper drop in personal consumption and core PCE. The contraction in GDP is mild when compared to past recessions and raises the risk of a sharp decline in fourth quarter GDP. Many people believe that the current downturn is the worst since the Great Depression and if that is true, we could easily see GDP fall by 4 or 5 percent in one quarter. In 2001, GDP contracted by 1.4 percent in the third quarter. In 1990, GDP fell by 3 percent in the fourth quarter and in the first quarter of 1982 GDP dropped a whopping 6.5 percent. There is no reason why the US economy will be able to skirt a major decline in GDP and for the worst case scenario to be just a 0.5 percent contraction.

With oil prices falling and the election in November, consumer confidence has rebounded from its all time lows. Although the index is still at second the weakest level since 1974, it is moving in the right direction. The larger than expected decline in House prices and the Richmond Fed manufacturing index reflects the continued troubles in the US economy. More economic data is expected on Wednesday, which could lead to further volatility in the US dollar. We have durable goods, personal income, personal spending, core PCE, the PCE deflator, jobless claims, Chicago PMI, the University of Michigan consumer confidence index and new home sales due for release.

Remember this is a Crisis of Confidence

Despite the pessimistic outlook for the US economy, it is important to remember that this was a crisis of confidence. So priority number one for the outgoing and incoming Presidents is to restore confidence. Since Friday they have done a good job with that and if Obama outlines more plans in his speech tomorrow, we could see a further recovery in risk appetite. Don’t forget that the additional monetary stimulus is also in the pipeline with the Fed expected to cut interest rates again in December.


Over the past 3 trading sessions, the British pound has staged a very strong rally thanks to the fiscal stimulus announcement from the UK government yesterday and the central bank’s pledge to deliver monetary stimulus next month. The government continues to try everything at their disposal to stimulate the economy and so far they haven’t ruled out further options. Bank of England Governor Mervyn King said this morning that more government injection may be needed to avoid a deeper recession in the UK economy. Third quarter GDP numbers is due for release tomorrow and growth is expected to be negative for the first time since 1990. In the second quarter, growth was flat. The recent price action in the British pound indicates that traders are looking beyond the present and into the future. All of the proactive measures made by the UK government should begin paying dividends in the first half of 2009.


The Euro soared above 1.30 following this morning’s announcement of new lending programs by the Federal Reserve. German GDP was right in line with expectations, yielding little action in the Euro. Even though the largest country within the Eurozone is in an official recession, the European Central Bank continues to signal to the market that they are in no way considering BoE style rate cuts. ECB member Bini-Smaghi said this morning that the solution is to not cut rates too low when deflation evaporates and warned that sharp rate cuts may hurt market confidence. These not so dovish comments have contributed to the sharp rally in the Euro today. German consumer prices are due for release tomorrow and inflationary pressures should ease just as it has in the rest of the world. The break of 1.30 in the EUR/USD leaves the currency pair with no major resistance until 1.3200.


As we indicated in Monday’s Daily Currency Focus, the risk for Canadian retail sales was to the upside. The labor market has been holding up well and wholesale sales increased materially in the month of September, which is the same period as the retail sales report. The increase in spending was driven primarily by auto sales which rose for the first time in 8 months. Recent interest rate cuts may have also contributed to the higher spending, making US retailers envious of their Canadian counterparts. The stronger consumer spending report has driven the Canadian dollar higher against the greenback for the third consecutive trading session. The Australian and New Zealand dollars on the other hand were held back by the sharp volatility in US equities. There are no releases from Canada, Australia or New Zealand over the next 24 hours.


Japanese Yen crosses are weaker across the board today despite the rally in US equities. If equities stayed in positive territory throughout the US trading session, the yen crosses would have probably gained strength but the wild intraday fluctuations kept currency traders nervous. The Bank of Japan announced in their monthly report that exports are expected to decrease as the financial turmoil hits the world’s economies. Honda stated that they may not make a profit in the second half of 2008 while Toyota expects to cut production and forecasts a decline of profit from last year of 70%. With the manufacturing sector hit the hardest, companies are slashing production, investments, and employment. The weakness in manufacturing and exports will keep the Bank of Japan on a loose monetary policy. They even downgraded their assessment of the economy for the first time in 3 months. With no substantial news coming from Japan in the upcoming 24 hours, we will have to wait for Thursday before we see more evidence of the problems plaguing the Japanese economy.

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

The currency in play for the upcoming 24 hours will be EUR/USD based on the Durable Goods, Personal Consumption, and Personal Income from the U.S. around 13:30GMT or 8:30AM EST.

After a breakout of the falling wedge in the EUR/USD in the past 2 trading session, we have seen a considerable amount of gains in the currency pair. It is now trading in the Bollinger Band buy zone signaling the potential for further gains. The pair looks over bought as it appreciated almost 650 pips in the last 3 days. Nevertheless, the bias is to the upside with resistance originating at 1.3200. The resistance is derived using the low of 1.2328 which is now a long-term support level and the high on the year at the price of 1.6037, which is the 23.6% retracement of the extremes and also close to the 50 SMA. The pattern will be negated if the first support is broken. The first support level originates at the first standard deviation of the Bollinger Bands, which is also the 23.6% retracement of the September high and October low standing at the price of 1.2930. The second support level will yesterday’s low at 1.2566. With high volatility in the markets and substantial economic data coming from the both countries, we possibly could expect one of the levels to be broken.


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 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 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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