The Euro traded higher from US session lows overnight, keeping a firm grip on the 1.41 level. Sterling traded in a wide 100-pip range but managed to hold above the intraday bottom. The Federal Reserve stepped in to save AIG overnight, buying an 80% stake in the firm for $85 billion dollars. European session price action is likely to continue taking its cues from developments on Wall St.
[B][U]Key Overnight Developments[/U]
• US Fed Steps in to Save AIG, Buys 80% Stake for $85 Billion
• Australia’s Annualized Growth Slowed in July, Says Westpac
• Japan Keeps Rates Unchanged at 0.50%, Adds ¥1 Trillion to the Market
[U]Critical Levels[/U]
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The Euro traded higher from US session lows overnight, keeping a firm grip on the 1.41 level. DailyFX Senior Currency Strategist Jamie Saettele sees EURUSD retracing to 1.4908 before the bearish trend resumes. Near-term resistance is found at 1.4266, with support at 1.4032. Sterling traded in a wide 100-pip range but managed to hold above the intraday bottom. Support is seen at 1.7708 and resistance at 1.7983.
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[U]
Asia Session Highlights[/U][/B]
Australia’s [B]Westpac Leading Index[/B] printed at 0.2% in July, bringing the annualized growth rate down to 3.7% from 4.0% in June. The release marks the second consecutive month below trend growth at 4.2% and further bolsters the Reserve Bank of Australia’s assertion that the economy has slowed enough to contain inflationary pressure and begin cutting interest rates. The bank sliced 25 basis points off borrowing costs last week, bringing the benchmark rate to 7.00%. The market is currently pricing in an additional 100 -125 basis points in rate cuts over the next 12 months.
The [B]Bank of Japan[/B] voted unanimously to keep borrowing costs on hold at 0.50% as expected, citing slowing domestic growth, sluggish exports, and tension in the global financial markets. Policy markets did warn against the risk of keeping rates low for too long, citing rising global inflation trends. That said, Governor Maasaki Shirakawa stressed policy flexibility given the current turmoil in the credit markets. The bank followed the lead of other global monetary authorities, adding another 1 trillion yen to grease the wheels of the financial system. The BOJ has injected a total of over 5 trillion yen ($47 billion dollars) into the market since number-four US investment bank Lehman Brothers declared bankruptcy while Merrill Lynch had to sell out to Bank of America.
Forex traders have seen blistering volatility since the beginning of the week. Lehman’s downfall was quickly followed by news that [B]American International Group Inc (AIG)[/B], the world’s largest insurance company, approached the US Federal Reserve for a bridge loan to avoid implosion. The company suffered $18 billion in loses over the past three quarters on loses from mortgage-linked securities. Authorities stepped in overnight to stave off what would have been the biggest corporate bankruptcy ever, with the Fed offering AIG $85 billion in exchange for an 80% stake in the ailing firm. Analysts have estimated that an AIG collapse would cost the financial system about $180 billion dollars, half of the capital they have raised since the beginning of the credit crunch. Stock markets greeted the news: US index futures rallied in after-hours trading and Japan’s benchmark Nikkei stock index added 2.1%.
[U][B]
Euro Session: What to Expect[/B][/U]
The [B]Bank of England[/B] comes into focus in European trading hours with the release of the minutes from the last policy meeting. The initial announcement had been essentially a non-event, producing no change in borrowing costs and no statement giving insight into what policymakers aimed for going forward. Commentary out of the UK had been particularly dovish ahead of the rate decision and traders will look to today’s release to see if perennial dove David Blanchflower managed to attract some converts on the MPC. Bond yield forecasts continue to call for the first quarter-point cut in the fourth quarter of this year while index swaps see over 100 basis points in cuts over the next 12 months.
In the Euro Zone, the [B]Trade Balance[/B] is expected to see the deficit widen to -3.0 billion euro in July. The release is likely to follow a similar dynamic to that seen in the analogous metric for Germany, where the surplus shrank to 13.9 billion euro in July from 19.9 billion in the preceding month. That release was undermined by weaker export growth, down -1.7% as the global slowdown crimped overseas demand. Meanwhile, imports saw the biggest gain since June 2002 at 7.4% as higher oil prices boosted inbound volume readings. Indeed, crude set an all-time high at over $147/barrel in July before falling sharply lower in recent weeks.
On balance, European session price action is likely to continue taking its cues from developments on Wall St. We suggested earlier this week that the turmoil has benefitted the US dollar as investors cashed out of risky assets, taking to the sidelines until the dust has settled. The exodus has seen trading volumes shrivel, sapping liquidity, amplifying volatility and raising transaction costs (trading spreads, overnight borrowing rates). This lends itself to more knee-jerk price action as traders respond to news that the Fed has stepped in to bail out AIG.
[B][U]Related Articles[/U]:[/B]
Forex Technicals: The Day Ahead, September 17
Lehman Fails And AIG Is On The Verge - What Is The Currency Impact?
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To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.[/I]