FX markets have entered the holiday season on a
quieter note as majors traded in tighter ranges
relative to last week's record swings. Risk appetite
is largely subdued and most indices in the
Asia-Pacific region are in negative territory, with
the notable exception of the Nikkei which is positive
despite more disappointing data out of Japan. The
announcement by the White House last week regarding
the provision of an emergency US$17.4bln loan to the
US car industry has certainly helped steady sentiment
around the world and removes a key short-term event
risk heading into year-end. This could see
significant fallout at the end of the first quarter
when the markets begin to realize how massive this
global financial restructuring is and will be, which
will knock heads and rattle cages and drain accounts
as the tsunami wave 2 hits. This global crisis will
not end overnight and we've much more excitment to
keep is getting out of bed in the morning.
Forturnately, if you know what you're doing, FX is
one of the only sectors to make money in this market.
That is, of course, you can manage risk like the
professionals... ahem, prudent professionals... not
like the former wall streeters.
The dollar was steady in a range of 1.3911-1.4048
against the euro and 89.10-90.24 against the yen.
Crude prices are also slightly firmer on the back of
The dollar recouped some of its recent losses against
the major currencies as oil fell to the lowest level
since 2004 and the credit outlook of a major US
corporate was downgraded. Investors shrugged off the
recent OPEC announcement to cut 2 mm barrels per day
and less demand pushed crude prices below $40, where
they stayed throughout the session. As the year-end
approaches, there is still no solution for the
automakers. The Bush administration said it continues
to work on a solution as the automakers have shut
down plants for now in efforts to conserve cash.
The US dollar has virtually collapsed since mid
November, but we don't think USD weakness will last
and expect a dollar comeback in 2009. With the
current global financial crisis, global rates are
converging towards zero with deflation risks looming.
While carry may benefit on aggressive action in the
short-term, we prefer to be long currencies which do
well when global central bank rates move towards
zero. Current account surpluses also provide a source
of steady currency inflow. We believe investors will
seek safety, liquidity and a store of value in such
an environment and the USD and JPY meet those
criteria. But the view can change in these uncertain
times. I don't like that my next trip to Europe and
that of the Monaco Grand Prix will, after fee's etc,
will have me paying almost 2:1 on EUR/CAD, thus coffe
and a croissant for 2 persons downstairs from the
apartment will cost approximately $30 CAD. Or a round
of 4 beers at the local pub on Grand Prix Wednesday
will cost about $200. But its worth it, i guess.
The Fed reduced the target rate 75bp to a range of 0%
to 0.25% and was very aggressive in its accompanying
statement. The decision was unanimous, as the FOMC
said they were committed to keeping the rate at
"exceptionally low levels" for "some time." They did
not mention quantitative easing, but they remained
committed to using unconventional policy tools to
fight the recession. Possible tools include
purchasing long-term Treasury securities, purchasing
agency debt and mortgage-backed securities and
implementing the TALF, which could promote credit
extension to households and small businesses. Given
that the rate is essentially zero, UBS economists
feel like this was as aggressive as the Fed could
get. The FOMC decision came after a record monthly
decline in the CPI and a mixed start to the Q4
earnings season. CPI was -1.7%m/m (cons -1.3%) as
weak energy prices and a weak core CPI (0.0%m/m, cons
0.1%) drove down the reading. In corporate news, a
major US bank missed earnings but a large retailer
managed to beat expectations. With downbeat
expectations for earnings season, there is a greater
chance of surprising results to the upside. The
automaker story continues, with press reports
suggesting the Big Three may yet be given access to
TARP funds. However, for the automakers to receive
more than the $15bn left under the first tranche of
TARP, the Bush administration will likely have to
make concessions with Congress in order to access the
second tranche. In other news, OPEC will discuss
production cuts when it meets today, with reports
suggesting a cut of about 2 million barrels per day.
Another Bloomberg interview with Jim Rogers for you.
Watch the interview
BoC cut its policy rate by 0.75% to 1.5% (0.5%
expected), the lowest level in 50 years.
The new US 4-week Treasury bills were sold at a high
rate of 0% and rate of 3-month Treasury bill briefly
traded in the negative territory.
The US government and Congress were negotiating terms
for emergency loans that could give taxpayers an
equity stake in the US automakers.
US equities retreated after two days of big gains, on
the profit warnings from FedEx and other companies.
Dow fell 242.85 points (2.72%) to 8691.33 and
S&P500 gave up 21.03 points or 2.31% at 888.67.
Transportation stock led the pull-back, with Fedex
plunged 14.5% after saying its 2009 profit would fall
shy of estimates.
Markets were also rattled by an extraordinary sale of
US Treasury bills which saw an unprecedented 0% rate.
This highlighted the dysfunctionality in the money
market as banks are unwilling to absorb new deposits
from other banks and agencies and would rather pile
it into equivalent maturity treasury.
RBA Cuts Rates to 4.25% - Ref: UBS
Risk sentiment deteriorated further amid the
unsurprising, but official confirmation for the US
being in a recession, less constructive commentary by
Fed Chairman Bernanke, and poor macroeconomic data.
According to the National Bureau of Economic Research
(NBER) the current recession began in December 2007,
due in large part to the decline in jobs. The
recession is likely still ongoing, as recent data has
been getting worse. Fed Chairman Bernanke highlighted
that the US economy remains under considerable stress
and that more rate cuts are possible. He also noted
that the scope for reductions to aid growth remains
limited at this point. Bernanke alluded to
quantitative easing (QE) like policies such as buying
longer-dated Treasurys and agency debt as a way of
injecting liquidity. His comments, while not
explicitly mentioning QE, drove down long-term
yields, consistent with the experience in Japan when
it engaged in QE. The 2y Treasury yield is 0.88% and
3.22% on the 30y Treasury. The 2s10s Treasury curve
is now 183bp, down from the mid-November high of
262bp. On the data front, the manufacturing ISM for
November fell another 2.7 points to 36.2, following
sharp declines in October and September. Read