From Inflation To Deflation In The Blink Of An Eye
From Inflation To Deflation In The Blink Of An Eye
Overall: Poor profit reports once again hurt the sentiment for equities on Wednesday. The story on the dollar was all about European rates cuts although why traders decided to trade a cut from the ECB during last night’s session (as opposed to another session since it really hasn’t been a secret for quite some time that the ECB will reduce policy again) was not exactly clear. The story was very different with regards to the BoE however. Most fascinating was Governor King, who in one fell swoop changed the bias to deflation when he said Britain’s worst banking crisis since World War I is likely to push the economy into a recession, requiring policy makers to act “promptly” to prevent inflation from slowing too much. Overnight rates may not be relevant in terms of what banks are paying to borrow now anyway since the Fed, ECB and BoE are all tendering for up to 28 days below their respective targets.
The Euro (Eur/Usd) moved lower as speculation grew the ECB would reduce interest rates. As such, the market is re-valuing the euro, reducing the single currency’s holdings. The pair fell 180 pips overnight, after the pair retraced some of the declines during the European session after it fell as much as 300 pips. In Asian trading, the pair reached a two-year low. The pair found a bottom in N.Y. even as stocks and oil declined.
The Pound (Gbp/Usd) downtrend is continuing, as the pair has declined approximately 900 pips over the last two days of trading. Overnight, the pair tumbled as much as 500 pips, reaching the lowest point since September 2003, but managed to retrace a small percentage of the losses. As has been the case over the last few days, the recorded volumes were lower than normal. Once in the N.Y., the pair found support on 1.6136. The BoE’s minutes from the emergency meeting held October 8 showed that the committee voted unanimously in favor of a 50 basis point rate cut, in conjunction with the world’s major central banks. The bank’s view is that the risk of inflation has definitely shifted to the downside, while conditions in international markets have deteriorated even further. The voting committee sees that the recent development in the U.K. economy has substantially deteriorated since the last meeting, reflecting a sharp monetary contraction.
The NIESR projected that the U.K. economy will contract by 0.9% in 2009, the first full year of recession since 1991. The thinktank expects to see the BoE lower rates to 4.00% by early 2009.
The Aussie (Aud/Usd) weakened during last night’s Asian session, as the pair continued the momentum from Tuesday’s trade. However, the pair found a base at the 0.6650 level and rose during European trading. Entering the U.S. session, the aussie was trading approximately 60 pips higher from Tuesday’s close, despite equities moving lower in global markets and gold prices falling overnight. The aussie had the smallest decline to the dollar of all the high yielding currencies, perhaps, because in previous days, it fell the most.
The Cad (Usd/Cad) gained 500 pips during the last 3 trading days, reflecting the selling pressure from the crude oil market on the Canadian dollar. During the overnight sessions, the cad strengthened once again, gaining a little more than 200 pips, in a trading period that, on average, sees the pair move 40 pips at most. The cad is now trading at a two year high. By the start of the N.Y. session, the pair had risen an additional 400 pips.
In economic news, Retail Sales fell by 0.3% in August after lower sales in the automotive sector more than offset higher sales in five of the seven other sectors. Excluding the entire automotive sector, retail sales in the other seven sectors combined rose by 0.4%. Price changes had little effect as retail sales in volume (core) terms also declined by 0.3%. This was the third decrease in four months. Also, the Leading Index fell 0.2% in September, capping a streak of five consecutive increases. Most of the reversal originated in a sharp drop in the stock market; excluding it, the composite index would have been unchanged.
The Swissy (Usd/Chf) gained 150 pips in overnight trading, reaching TheLFB R3 (1.1685). The pair has strengthened for 5 days, in which it has gained 350 pips, breaking above the 1.1500 resistance area. The pair declined in N.Y., and looked to finish near session lows.
The Yen (Usd/Yen) extended losses during the overnight sessions, following on from Tuesday’s trade, falling another 100 pips. During the Asian session, the yen tested the 99.00 support level, but was unable to break below until the European session saw losses in equity markets and U.S. futures continued to fall. The pair entered the U.S. session below 99.00 and found support at 97.82.
Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com
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