Forex Investment and Currency Trading

The September Quarter-End has come and gone and the mood in the FX Fwds market is…..hopeful. These last 2 days have provided a glimmer of hope, but we’re far from anything normal (only back to the levels seen on Monday). Following Tuesday’s epic blowout, we’ve retraced about 200bps on Implied USD Yields from the 1-3mth tenors as quarter-end concerns have abated and ongoing developments regarding CB liquidity operations soothed the market. Today, the ECB’s O/N USD funding auction came in at 2.75%, which is a drastic improvement from Tuesday’s 11% high and the more confidence the CB’s can instill in the O/N and T/N tenors, the stress will be relieved from the further-dated tenors. Accordingly, the O/N and T/N tenors are trading between 3-5% USD Implied Yields for most currencies, still a bit off from normal. Forward TAF Auctions, Increased Swap Lines, Increased Notionals for Auctions, and coordinated rate cuts will all help to restore normalcy to the market, but the biggest fear, by far, remains Trust. Nearly impossible to enforce and more a function of time than anything else, confidence and trust must return to get the ball rolling again. We hear Greece is jumping on Ireland’s bandwagon in guaranteeing interbank lending, a positive development. On the Libor issue, Dec08 Eurodollars have stayed steady between 96.65 and 96.75 lately, indicating the market believes things will return to “normal” in a couple months given it’s 100bps below where 0*3s are trading now (4.30%) and where Libor set today (4.21%). NYFR, a more accurate measure of 3-mth lending, set at 4.61% and has been steadily increasing everyday, but the spread between NYFR and Libor (40bps) has been decreasing everyday - an encouraging sign.
 
From today’s ECB meeting, the most noteworthy comment was “We are totally free to do anytime what’s necessary,” which to us, enables them to get off the inflation pedestal and opens door to a possible inter-meeting rate cut…..if the broken European Banks don’t make it to the next meeting.
 
Finally, tomorrow should be big buzz with a double-dose of NFP and TARP action. Pretty sure the market won’t see the vote as a sure-shot this time around, but a consensus market reaction would seem to be Sell USD & Sell US Treasuries after the Bill passes.