The Dollar would rally against most major currencies including 300 points gains against the Euro, Yen and Pound erasing the gains from the past few days. The Euro had reached as high as 1.454 and breaking above the 20 Day SMA for the first time in aver a month.
Talking Points
• Japanese Yen: Renewed Risk Appetite Sinks Yen
• Pound: U.K. Freezes Short Selling
• Euro: Firming After Freefall
• US Dollar: Leading Indicators and Philadelphia Fed on Tap
Euro, Pound And Yen Drop As U.S. Plans To Create Entity To Purchase Troubled Assets
The Dollar would rally against most major currencies including 300 points gains against the Euro, Yen and Pound erasing the gains from the past few days. The Euro had reached as high as 1.454 and breaking above the 20 Day SMA for the first time in aver a month. The news that the U.S. would create an entity that would buy troubled assets from banks and removing them from their balance sheets allowing them to return to a normal business environment. The Bullish dollar sentiment would send the pair as low as 14151 but failing to break this support level twice may signal that the Euro could move higher from here, until the final proposal is revealed and ratified.
U.S. politicians along with U.S. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke all presented a united bipartisan effort to establish an entity as fast as possible in order to bring about a resolution to the banking crisis as soon as possible. The plan is that the Fed will be giving the authority to buy mortgage back securities and hold them to maturity, which is expected to be in the range of $850 billion. Additionally the SEC put a temporary hold on short selling which would lead to a massive short covering. The concerted effort led to a worldwide rebound relief rally in equities that started at the end of the day in the U.S. and has filtered through into the Asian and European markets. The renewed risk aversion has rallied the USDJPY which jumped over 300 points to 107.77 from 104.00
The pound also fell over 300 points on the U.S. news before finding support at 1.7911.Meanwhile the U.K. took measures of their own by instituting a 120 day freeze on short selling in order to prevent further stocks losses by banks. Speculation had grown that the BoE may institute an emergency rate cut. The British housing market is in similar trouble as the U.S. and the central bank may need to take measures to turn it s fortunes around. However, committee member Tim Besley has come and warned that the MPC must not act hastily and digest all of the recent events before their next policy meeting on October 9, where the may cut rates. Credit Suisse overnight index swaps are pricing in 96 bps of cuts over the next 12 months which could start to weigh on the Sterling going forward.
An empty U.S. economic calendar will leave price action at the mercy of the broader economic winds and the interpretation of the potential impact of the plan from the U.S. policy makers. The current equity rally should extend through the U.S. trading sessions which may add to dollar bullish sentiment. If traders believe that the removal of these toxic assets from companies balance sheets will allow the economy to move forward and the housing market to rebound then the U.S. economy will become more attractive for investors. Although the FOMC is expected to leave rates on hold for the foreseeable future, the chances have increased that the BoE and ECB will have to cut their benchmark rates which should add dollar support over the medium term.
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