The Euro and British Pound shot higher overnight as the forex market reacted to news of a US government takeover of troubled mortgage giants Fannie Mae and Freddie Mac. Adding to downward pressure on the dollar, crude oil prices pushed higher above $108/barrel as Hurricane Ike gathered strength en route to the Gulf of Mexico. The forthcoming session is set to see a continuation of overnight momentum as European markets price in the changes seen over the weekend.
[B][U]Key Overnight Developments[/U]
• US Treasury takes over Fannie Mae, Freddie Mac
• Crude oil pushes above $108/barrel on Hurricane Ike concerns
• Euro, Pound rebound sharply against the US Dollar
[U]
Critical Levels[/U]
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The Euro shot higher overnight, testing above the 1.44 level having closed at 1.4232 last week. A sustained break above 1.44 sees resistance at 1.4497 with pivot support at 1.4320. Sterling rallied from last week’s close at 1.4639 to penetrate above the 1.79 level. Resistance is seen at the psychologically significant 1.80 level, with pivot support at 1.7847.
[U][B]Asia Session Highlights[/B][/U]
The data docket fell by the wayside again in overnight trading as the forex market reacted to news of a US government takeover of troubled mortgage giants [B]Fannie Mae[/B] and [B]Freddie Mac[/B] to prevent the record surge in loan defaults from toppling the backers of about half of all US home loans. [B]Treasury Secretary Henry Paulson[/B] justified the move saying, “Our economy and our markets will not recover until the bulk of this housing correction is behind us.” The news was embraced by stock markets as investors breathed a sigh of relief at the containment of a key risk facing financial markets.
Interestingly, the US Dollar sold off sharply against the spectrum of major currencies, with the Yen alone in losing ground against the greenback. This and last week’s price action suggests recent trading has been guided by cross-asset money flows. Specifically, the dollar saw seemingly inexplicable bullish momentum towards the end of last week even as key jobs data disappointed all the while stock markets slumped. These flows appear to have been driven by investors closing out of comparatively risky investments (i.e. stocks) and moving funds into cash. Considering the interest rate outlook for 2009, it makes sense that the cash of choice was the US dollar. Indeed, bond yields forecast that the Federal Reserve will begin raising rates in 2009 while most other central banks will cut them. Today sees a reversal of this dynamic as the containment of the Freddie and Fannie problem sees a rebound in risk appetite.
Adding to downward pressure on the dollar, crude oil prices pushed higher above $108/barrel as [B]Hurricane Ike[/B] gathered strength en route to the Gulf of Mexico. Refineries in the area account for 26% of US oil production. The greenback is set to issue the first down day in seven trading sessions against the major currencies. Current positioning is pointing towards a correction in the fledgling US Dollar rally seen in recent weeks.
[U][B]
Euro Session: What to Expect[/B][/U]
The forthcoming session is set to see a continuation of overnight momentum as European markets price in the changes seen over the weekend. [B]Swiss Unemployment[/B] is seen rising as the mountain nation sees slowing demand at home and in key export markets (i.e. the European Union) trickle into the broad economy. Indeed, key indicators of economic health have started to turn south in the second half of the year. The metric is expected to tick to 2.4% in August versus 2.3% in the preceding month.
In the UK, August [B]Producer Price Index[/B] figures are expected to begin reflecting the selloff in crude oil and other commodities. Input PPI is seen falling -1.2% having lost -0.6% in July while the growth rate of Output PPI is seen slowing to 0.1% having printed at 0.4% in the preceding month. On balance, the clearest indicator of the trajectory of the price level is the annualized Core PPI Output figure as this will likely come closest in foreshadowing the trend in consumer price inflation. This figure is seen declining to 6.6% in August from 6.7% in the preceding month. This will mark the first slowing in the growth rate since February and point to a topping out in the sharply accelerating trend seen over the course of 2008. Moderating inflationary pressure will give the Bank of England room to ease benchmark borrowing costs to support sagging economic growth, with bond yields calling for the first in a series of rate cuts to arrive in the fourth quarter.
The Euro Zone’s [B]Sentix Investor Confidence Index[/B] is set to decline to -18.3 in September having issued a reading of -15.3 in August. The release is seldom market moving, though the downward trajectory makes sense as economic growth grinds to a halt in the 15-nation bloc.
[B][U]
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[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]