Forex Investment and Currency Trading

Current account balance (Survey: -183.8BN, Actual: -172.9 BN)
Empire Manufacturing (Survey: -7.4, Actual: -22.2)
Net Long Term TIC Flows (Survey: $60.0BN, $62.0BN)
Industrial Production (Survey: -0.1%, -0.5%)
NAHB Housing Market Index (Survey: 20)

Upcoming Economic releases: FOMC Rate Decision, PPI, Housing Starts, Building Permits

US data today was mixed:  TIC data as expected at +$62 bio, with a record net purchases of $36 bio of US Treasuries; industrial production -.5% on a big fall in utility production though smaller fall in manufacturing; Q4 current account narrowed $4.5 bio and is expected to continue to improve on slowing US demand and the declining trade value of the USD.

Last night’s news of the Fed’s 25 bp emergency cut in the discount rate, with emergency funding to brokers, and that Bear Stearns will be purchased for $2/share jolted markets and sent the dollar plunging to a new Euro high over 1.5900 and a new 12 year low vs yen of 95.80.

The USD was sold aggressively with the “other reserve currencies” JPY and EUR leading the charge with JPY trading to 95.77 and the EUR trading to 1.5905 (a new record high). The USD has come back a bit this morning but remains on the defense.

As far as USD/CAD is concerned the market continues to trade in a range - it’s still tough to make a clear call for a sustained directional move one way or the other……….shaky equity markets and concerns the Canada will get dragged down into the mud prevent CAD from strengthening through .9700. Strong commodities and a weak USD complex prevent Canada from weakening through parity.

FED is in “Panic mode”  announcing another new credit facility overnight :

Primary Dealer Credit Facility: overnight lending, effective immediately, wider range of collateral (anything investment grade), so a form of FED FUNDS that  is available to any primary dealer and against diminished collateral. 

For the first time ever the Fed opened access to the window to all primary dealers and placed no limit on the loan size. The Fed has expanded the number of securities which can be used to secure these loans. Now any investment grade debt can be used as collateral.

The Fed’s move provoked a sense of urgency about the US economy which reinforced the dollar sell mentality.  The dollar has recovered in the US morning, Euro concentrated in low to mid 1.5700’s and USD/yen over 97, but the VIX volatility index is near late January highs and FX traders note illiquid conditions. 
 
The market is currently pricing in a 100 basis point cut in the overnight rate by the Fed tomorrow.

Sterling weakened considerably against both Euro and USD on fears about the health of UK financial companies given the overheated UK housing sector and high UK consumer indebtedness.  USD/CHF broke under parity on Friday, a historic event, and hasn’t looked back, touching .9640 overnight.
 
Explaining the notable relative weakness in GBP, the UK banks rushed to borrow GBP 23. 6 bln at an auction facility that was supposed to auction GBP 5 bln.  There is a fear that, with US investment banks under pressure, UK depositors would be looking to take cash from institutions which are exposed. 
 
Commodity currencies are pressured lower on US recession fears, consistent with declines in metals (gold down $30) and oil (down $5), leaving USD/CAD over .99 and AUD near .9200, the latter also suffering from risk aversion.