[B]Talking Points
• Japanese Yen: back above 108.00 as carry flows return
• Euro: Tests 1.4620 on broad dollar strength
• British Pound: North Rock nationalized cable drops
• US Dollar: Markets Closed[/B]
Currency traders returned from the week-end to the news that UK government has decided to nationalize the troubled Northern Rock bank rejecting two private offers despite complaints and threats of litigation from the companies shareholders. Initially the announcement produced no impact in Asia with GBPUSD even trading up from Friday’s levels, but the London open brought an onslaught of sell orders as the market became concerned about the integrity of the UK banking system.
Some of the deeper worries amongst pound bears center not on the Northern Rock situation itself (NR’s troubles have been well know to the marketplace for more than six months) but rather on the possibility of yet more rescues of other UK banking institutions caught in the sub-prime credit crisis. If this indeed is just the start rather than the end of government aid and intervention, the UK financial system - which has become the cornerstone and the primary engine of growth for the UK economy - could come under further stress putting significant pressure on the BoE to begin easing aggressively.
The pound tumbled as a result, with the greenback gaining on the euro and yen as well. Carry trade flows were not a factor tonight. Instead the market saw an old fashioned broad based dollar rally, as the Northern Rock news highlighted the idea that while the US economy is far from healthy, the situation in the rest of the world may be decidedly worse.
With US closed for President’s day holiday, the North American session is unlikely to provide further fireworks. The EURUSD continues to trade in a 1.4500-1.4800 zone as traders look for the next big theme to develop. This week the calendar is relatively tame with only the CPI data providing any meaningful guidance to traders. Market is looking for a slightly hotter number of 4.2% vs. 4.1% bit a strong possibility exists that the data can surprise to the upside given the escalating costs in energy and food. This will of course has put the Fed into a bigger bind as they will have the unpleasant choice of either curtailing inflation or stimulating growth. For the time being the markets continue to tread water as these countervailing forces keep prices range bound.
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