Forex Investment and Currency Trading

As has become almost commonplace, it was another wild weekend, as official entities rushed to deal with financial turmoil before the Asian open to remove potentially confidence crushing uncertainty. If anything events in the US went about as well as they could. US policymakers managed to find enough common ground to find the financial sector bailout package (TARP), which has ballooned from Paulson’s original three-pages to now 110. The House will vote on the measure today and they all 435 members can hit the campaign trail touting how they all came together at a time of national need, and how their efforts have helped limit the risk to Uncle Sam and US voters. The Senate votes Wednesday and soon after the money starts flowing. The package is now in three tranches — USD250bn right away, USD100bn after a progress report to Congress, and the rest, USD350bn, only if needed. There were also enough bells and whistles to bring enough Democrats and recalcitrant House Republicans to give the measure bipartisan support. As one would imagine in such a contentious and volatile situation, some of the potentially most difficult issues were left for the next president to sort out, which should give more gravitas to the next two presidential debates.

EUR and GBP are two of the worst performing currencies heading into the NA session. While, fear that US policymakers would twiddle their thumbs as the financial sector and the economy imploded have waned, other developments were stark reminders that there are more than enough worries over financial stability. UK regulators (the FSA) siezed embattled mortgage lender Bradford and Bingley, now joining Northern Rock in the government’s stable, and the governments of the Netherlands, Belgium and Luxembourg injected EUR11.2bn into financial group Fortis, after intense discussions with ECB President Trichet. With regard to the UK plan, PM Brown has pledged to “work day and night” to ensure financial stability. He might have to.

USD is thus rallying hard today, rising from Friday’s close of 76.95 to over 78, but this is less due to developments in US domestic policy and more due to the events overseas. Equities are distinctly lagging. Global equities are down well over 2.5% across the board, while US equity futures are pointing to a very weak opening. Concern about financial stability are at best uncertain, even though the US Treasury is about to crack open its piggy bank. Concerns about the economic outlook remain unsettling, and keep in mind that US nonfarm payrolls for September crash lands on Friday. Consensus looks for a 105K decline, but indicators of the job market leave one nervous that the pace of job cuts in the US is about to gather quite a bit of momentum. Today’s US income and spending data are pretty well meaningless, with the focus on the bailout vote. There is little fear of inflation in markets right now ahead of core PCE. Instead, there are distinct worries about the degree of slowdown in the US and global economies, particularly after Fed Chairman Bernanke’s effort to scare legislators straight last week. Swirling around these developments is a key uncertainty….will the US bailout package work? There are no guarantees, but worst case scenarios are hopefully off the table. In fact, despite the belaboured process to get Congress to agree on a package that might still turn out to be the easy part of this process. 

Risk-sensitive assets overall are under pressure: AUD/JPY has slumped below 87, lowest since September 19, when Paulson and Bernanke unleashed the audacious USD700bn bailout package. NZD/JPY has fallen below 72. EUR/JPY is trading near 152.33. GBP/JPY is trading just over 191. All of these pairs are testing support that could see them move to their recent lows, highlighting the tenuous confidence in markets right now.