Market Doesn't Care About Rescue Plan - Watch JPY Strength Continue
05/10/08 14:54
The 700B rescue plan was finally approved on Friday.
I view it with mixed perspective, as it was a
necessary action, but the plan will not endure
without consequence . Senate was ready to approve the
plan on Wednesday awating Bush to sign off on it to
relive the financial world of the worse credit crisis
in history. The markets are also not convinced that
this is the solution. Dow ended up 7.3%% lower to
close the week. The news was, which had been largely
anticipated after the first rejection, was clearly
not enough to boost investors confidence. Dow indeed
closed lower than Monday's low, where the historical
777 points fall occurred after House initially
rejected the plan. S&P 500 also had it's worst
weekly decline since Sep 01 and fell 9.4%.
The impact on the forex markets can be seen clearly on massive yen buying on risk aversion. Dollar also benefited with most major currencies dragged down in yen crosses. Note that Aussie remains the weakest currency on falling commodity prices and dovish rate outlook. Although we may see a surprise announcement or comment from RBA following the strong Trade Balance last week. Euro caught up on the weakness after four major financial institutions in Europe were bailed out. Comments from Trichet after ECB meeting suggest the bank is close to cutting rates added further pressure to the common currency. Crude oil followed stocks and tumbled to as low as 91.3 and dragged Canadian dollar down sharply.
Looking ahead, development of the credit market crisis remains key to all financial markets. An important point to pay attention is whether DOW will be supported by the psychologically important level of 10,000 which will trigger volatile movements in yen crosses. In addition, BoE and RBA are both scheduled to meet this week. Both central banks are expected to cut rates this time. In particular, Sterling is the relatively better performing major currency last week but it could catch up again should BoE cuts more than expected or sounds they're more policy easing to come.
Anticipate coordinated central bank cuts, possibly this week and further jpy rally in the weeks to come.