The main development overnight was the Fed's announcement that it would participate in the commercial paper market. Mutual money market funds have been abandoning the market, which is causing a problem for major corporations that have short-term obligations to meet such as inventories and payrolls. The Fed will set up a special purpose vehicle to buy up uncollateralized company paper - an unprecedented development in central banking. Without access to a functioning commercial paper market, the risk of bankruptcy for fragile companies would increase and other otherwise healthy companies would have to sharply curtail production.

In another development, possibly taking advice from the host of Pro Traders Club, Fed Chairman Bernanke did make it clear that an interest rate cut will be forthcoming. He said:

"Overall, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate."

In today's session we are waiting for UK Chancellor to announce a comprehensive bailout package for the UK banking system. The announcement is due before the start of London trading,so you may want to take caution on any GBP or other trades. The BoE begin their two-day board meeting today. In the US session, pending home sales for August are due at 1400 GMT.

Events in the European Union over the past 48 hours have been particularly damaging to not only the euro, but also exposed the clear lack of unity within the 27-nation bloc when national interests are at stake. This has directly contributed to a sharp collapse in confidence amid fears that intra-union wrangling is simply too costly in a market environment where the fate of financial institutions have been decided in a matter of hours. Despite a leaders' summit over the weekend, individual countries resorted to unilateral action within 24 hours of a joint declaration, and clarity is still being sought over Germany's "guarantee" for state deposits. The Ecofin group of European finance ministers met overnight and are still trying to negotiate a common approach to such guarantees to prevent regulatory arbitrage leading to a influx of funds into countries which have pledged to fully guarantee deposits. Dutch Finance Minister Wouter Bos said overnight that "we risk a race to the bottom, or a race to the top" and this will happen unless a common approach is adopted with haste. Slovenia's Finance Minister also said that the need for a Eurozone-wide bailout fund will also be discussed but several nations have already expressed explicit disapproval of such a plan. We expect further announcements from the Eurozone today, and the market should also be on the lookout for any ECB commentary which may suggest greater flexibility in policymaking.

AUD

The RBA cut rates by 100bp to 6% yesterday, citing a significant deterioration in financial markets. This was more than the market's already aggressive call for a 50bp rate cut. AUDUSD initially fell from 0.7200 down to lows of 0.7000 and then traded back up to above 0.7200 levels. The fact that yesterday's policy surprise was a negative 50bp and the currency actually finished the session higher suggests that the currency has been oversold for now. While there is scope for a further short-term bounce in the AUD on improved risk appetite it is difficult to be bullish the currency given the household debt levels in Australia and the overwhelming theme of de-leveraging in global markets. The fact that the market was relatively unresponsive to positive to the 100bp cut suggests that the AUD may see some support here. The pre-emptive action by the RBA will soften the markets dovish view. It is almost to suggest that among the crisis, RBA's just slashed now, rather than dealing with the ongoing inevitability's. Below is the RBA press release...

RBA Stetement by Glenn Stevens, Governor Monetary Policy

At its meeting today, the Board decided to lower the cash rate by 100 basis points to 6.0 per cent, effective 8 October 2008.

Conditions in international financial markets took a significant turn for the worse in September. Large-scale financial failures in several major countries were accompanied by serious dislocation in interbank markets and heightened instability in other markets, including sharp falls in share prices. Official actions in a number of countries have been aimed at restoring stability, by adding to short-term liquidity and laying a foundation for longer-term recovery in the health of balance sheets. Nonetheless, financing is likely to be difficult around the world for some time ahead. This is also affecting Australia, albeit by less than in many other countries, given the relative strength of the local banking system.

Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia's trading partners in Asia. The expansionary effects of the recent surge in Australia's terms of trade are still coming through, but some decline in the terms of trade now looks likely over the coming year, with many commodity prices having declined from their peaks. This, combined with the likelihood of below-trend growth in the global economy, suggests that global inflation will moderate in 2009.

Thus far, the overall path of economic activity in Australia appears to have been close to what the Board had expected, with the needed moderation in demand occurring. The next CPI is likely to show an increase of around 5 per cent over the four quarters to September, but the Bank remains of the view that inflation will start to decline in 2009.

The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.

Given that background, the Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy. The Board also took careful note of movements in funding costs in wholesale markets. Having weighed these considerations, the Board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers. The Board does not, however, regard that movement as establishing a pattern for future decisions.

The Board will continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2–3 per cent target over time.

Tags: Rescue Package