Forex Investment and Currency Trading

This is what most people fear today – as the Argentina re-nationalization of their pension system looks like a desperate attempt to fund the country in the midst of yet another crisis of money. Their failure to pay their national debts caused a global mess – but everyone felt it could be contained then whereas now – the mood is very different. The CDS rates in all emerging markets have leapt up a notch and when governments are doubted in their ability to pay for debt, everyone suffers – particularly those lower down on the rung of obligations – like equities.  The run in G20 CDS is below for those concerned.  The risks got worse as Hungary overnight decided to raise rates 3% to stem the flow of money outside of the nation. If history is a guide then this is too little and will surely lead to another hike and intervention and then collapse of the economy.  The pain of EM and equities has been toxic for Europe – particularly when mixed with dovish central bankers. GBP has continued from the BOE King speech—MPC minutes adding a touch—making it scrap against the first 1.63 technical support on its way back to 1.58.  EUR followed with 1.30 break overnight leading to 1.2740 test.  The target zone of 1.2250 seems easy now – but expensive for those that want to speculate.  A 1.20 one touch was once a 12-1 payout at 1.45 EUR 10 months ago – and is today 2-1.  This is a market continuing its squeeze for USD.  Note that the FED term auction facility (TAF) yesterday was undersubscribed at 1.11% while the ECB TAF at 2.12 was oversubscribed.  The push to fix LIBOR is working 3M down another 30 bps to 3.54% – and the money markets in the G10 are better – but not so for the rest of the world.  Under the new rules for globalization we see the G7 leaders trying to fix the problem one-handed.  The risks for the day in the US are that despite better money rates, despite some earnings surprises to the upside, despite 10% of the S&P500 being below book value – the world is a messy place and deleveraging continues. When the USD gets to silly levels like 1.25 CAD or 15 MXN – its major trading partners benefit at the expense of the US – adding to the imbalances that got us into this mess in the first place.

The overnight price action and early London trading has been dominated by new lows in EUR/USD and Cable. On EUR/$, the acceleration below 1.332 retracement level targets the low 1.20s from a technical perspective. That said the Dollar has put in a robust performance against the rest of the majors other than the Yen. Risk aversion appears to be back on the table and Asian equity markets, particularly Japan, have performed poorly overnight.

Mervyn King’s use of the word “recession” in a speech last night has caused a flurry of excitement in the UK media. The Governors speech added to the weakness of the pound.

NEWS
AMERICAS

• US consumer confidence for week of Oct 19 -50 - lower than expected. Consensus -49. Previous -48.
• US mortgage applications for week of Oct 17 -16.6% w/w. Previous +5.1% w/w.
• WSJ: Yahoo Plans Job Cuts as Profit Plunges - Yahoo Inc. announced plans to lay off at least 10% of its work force, as the struggling Internet company posted a 64% drop in profit and eked out a slight revenue increase in its third quarter. The new layoffs, Yahoo’s second major round of cuts this year, amount to at least 1,500 of Yahoo’s roughly 15,000 full-time employees. The Sunnyvale, Calif., company’s stock — which has nearly halved so far this year — rose 5.2% in after-hours trading to $12.70, from its 4 p.m. Nasdaq close of $12.07. Investors appeared placated by Yahoo’s plans to cope with a weak economy with cost cuts and by signs that an ad-spending slowdown hasn’t derailed Yahoo’s business.
• Argentina: planned seizure of $29 billion of private pensions. The move stoked concerns the nation is headed for its second default in a decade. Investors say President Cristina Fernandez de Kirchner’s decision may further hurt markets already reeling from slumping commodity prices and slower growth. The retirement system, set up in 1994 to help bolster capital markets, owns about 5 percent of companies listed on the Buenos Aires stock exchange and 27 percent of shares available for public trading, data compiled by pension funds show.      Argentine bond yields soared above 24 percent before the announcement late yesterday, and the benchmark Merval stock index tumbled 11 percent. The last time the government sought to tap workers’ savings to help finance debt payments was in 2001, just before it stopped servicing $95 billion of obligations.