Forex Investment and Currency Trading

Yesterday the US House of Representatives unexpectly turned down by a fairly small margin the Troubles Asset Rescue Plan (TARP) put forth by the Treasury. This quite remarkable twist of events, with all the world watching, has left investors highly uncertain about what comes next. It is still possible that an amended version of the bill could be brought back to the floor, although given the mood of those that voted against it, this might be a very presumptuous judgement.

Congress will be in recess today, and will return to legislative business on Wednesday. Another vote then is possible, the earliest for which would be on Thursday. At this stage, it is not clear whether major concessions will be necessary, or whether minor changes to the bill would be enough to secure the incremental (mostly Republican) votes necessary for passage. In all likelihood, a bill will not be in place by the end of the week, as others had anticipated. Financial markets reacted sharply to the news, albeit in thin trading outside equities. The S&P shed just shy of 9% (the largest one day fall since Oct-87), 2-yr T-notes rallied some 45bp from Friday’s close, ending the session at around 1.70%, while credit spreads were wider across the board especially Financials (controlling for the rally in Wachovia’s CDS following the takeover by Citi). Crude oil, gasoline and natural gas all fell on risk reduction and expectations of further demand destruction.

Major FX markets were again dominated by cross border unwinding flows with a volatile price action. Average implied G10 FX vol has picked up further, reaching the highest levels since at least 2000 (13.4% for 1-yr). The Dollar strengthened across the board but stayed well within the ranges marked over the last couple of weeks.