[B]Talking Points[/B]
• Japanese Yen: Gaps below 114.00 post G-7 but sellers emerge
• Euro: Makes new record highs
• Pound: Holds the 2.05 level
• Canadian Dollar: bounces off 31 year lows
• US Dollar: Calendar empty with only CB speak today
After the typical post G-7 gap opening, FX markets settled down during European trade as traders awaited the start of the US equity trading. With no economic data to drive trade today, the direction in FX will likely be set by the flows in DJIA as currency traders look to see if the US stock markets will continue their down draft.
Last Friday’s -366 point plunge in the Dow, triggered by the disappointing earnings news from the large money center banks put investors in a dour mood, as speculation of a serious economic slowdown in the US swept through Wall Street. With Fed funds futures handicapping a greater than 75% chance of a Fed rate cut in October, the dollar continues to be pressured with EURUSD setting yet another record high at the start of today’s Asian trading session.
As we noted in our post G-7 analysis, “The absence of any clear indication of support from the G-7 suggests that monetary officials will not intervene either verbally or physically to stem the dollar’s decline. This leaves the greenback at the mercy of the speculators who will likely push it further down especially if they become convinced that the Fed will be forced to lower rates another 25bp in October with perhaps yet another 25bp cut in December yet to follow. The prospect of additional rate cuts and the lack of any political support leaves the greenback wide open to further momentum selling. The G-7 monetary officials may have miscalculated when they assumed that the US currency will continue its decline in a measured fashion. If the EURUSD hits 1.4500 this week, expect far more aggressive rhetoric from the G-7 authorities as fears of dollar dumping will begin to sweep the market.”
However, after staging one of the most impressive rallies of the year, the loonie is the one currency which may have trouble gaining additional ground against the greenback. On Friday the Canadian dollar set a 31 year high against the buck on the back of the hotter than expected CPI numbers, but with oil prices receding off their highs and a set of challenging economic data on the Canadian calendar this week, the CAD rally is due for a retrace. Finding the bottom in USDCAD has been a suckers game for the past month, but if oil prices correct this week USDCAD longs may be finally rewarded. The one substantial risk to this scenario is the escalation of tension on the Turkey/Iraq border. This week-end’s killing of 12 Turkish soldiers by Kurdish nationals will only exacerbate the situation and should military response ensue, all bets on a USDCAD will be off as crude may head above the $90 handle.
