German Bank Rumors Sparks EUR/USD Volatility

[B]Talking Points
• Swiss Franc: Trade Balance Maintains Surplus
• Japanese Yen: Supermarket Sales Remain Strong
• Euro: German Bank Rumors Drive Price Action
• Canadian Dollar: BoC Rate Decision Ahead
• US Dollar: Existing Home Sales on Tap[/B]

The purported troubles of a German bank sparked large swings in EUR/USD price action during the overnight sessions. The rumor that German bank Duesseldorfer Hypothekenbank was facing liquidity issues saw the pair fall over 75 points to 1.5833. The subsequent denials from the property lender sparked a Euro rally that erased the earlier losses and saw the pair above 1.5950 and making a run at 1.60. The only European fundamental data that crossed the wires was the Italian trade balance deficit narrowing to -1212 from -1313, although the news was in tune with the Euro rebound, the German bank story was the driving factor.

When reports surfaced that the German BdB banking association had taken control of lender Duesseldorfer Hypothekenbank, traders feared the worse on the heels of ECB President’s Trichet’s recent comments warning that the financial –market crisis was far from over as long as banks were reluctant to lend. The banking association has temporarily transferred the lender to one of its guaranteed funds; until Germany’s second largest housing lender can be sold. The move will allow the financial institution to get through the problems it faces brought on by the current credit crisis.

Traders have started to focus on the recent comments from Trichet and other ECB members reaffirming their hawkish stance. Council Member Nicholas Garganas stated today that the central bank won’t reduce rates if inflation remains high, and the course of future interest rates will depend on inflation risks. Expectations are growing that the interest rate differential between Europe and the U.S. will continue to grow, with the Fed expected to cut rates by at least 25 points at its upcoming meeting on April 30th. The current troubles of National City have sparked fear that the regional banks may be the next chapter in the subprime story and the Fed’s work may be far from over.

The BoC is expected to cut rates by a half point at today’s rate decision. Governor Mark Carney has continued to warn about the downside risks that the slumping U.S. economy presents to his country. The recent declines in Ivey PMI, building permits and wholesale sales have supported the central banks dovish stance. The com bloc currency has recently found support from record oil prices above $117 a barrel, but has continued to find resistance at parity.

The upcoming U.S. existing home sales release is expected to show further deterioration in the housing market, as economist are predicting a decline of 2.3% in March. The news may lead to speculation that the Fed may cut rates deeper than the 25 points expected and weigh on the dollar, especially following the recent reported loss by the Bank of American and the troubles of National City.

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