Forex Investment and Currency Trading

Equities are soaring and volatility plunging in response to the the SEC’s short sale ban and the US Treasury’s plan to insure money market fund deposits and to create an RTC-like entity to buy distressed assets from financial institutions.  Yen weakened to a ten day low vs the dollar, over 108, and against Euro, which broke over 1.4400 vs USD.  Paulson said this morning that the goal is to stabilize the mortgage and hence housing market but the markets wonder about the valuation of the distressed assets (if above market value, it’s a bail-out; if at market-value, then could some institutions still be at risk) as well as the cost to taxpayers.  Interest rate markets are mixed, Fed Funds Futures now at 1.93% for December, removing expectations for about 16 bp cut from just yesterday, but term interest rate spreads are still wide, and so are FX forward points. 
 
EM currencies have strengthened in tandem with lower volatities, the VIX down from yesterday’s 42 high to under 30 today; BRL/JPY, a proxy for FX risk, is up 6% from yesterday, though there’s been some pull-back in EM’s as yen has strengthened about a big figure vs the dollar and the Dow has retraced about 100 points.  Commodity currencies similarly gained, AUD up 275 points at the high and CAD stronger as oil saw $103, up about $10 from recent lows.  The”normal” relationship between the USD and risk taking appears to have been re-established (following early August safe-have USD buying on risk liquidation), with lower risk now USD negative.