- FX markets started the week off the same way they spent most of the previous session - selling the USD. There was a brief respite for the USD on Friday after it was announced the US Senate had failed to pass the US auto bailout package. However, the safe haven bid the USD received was progressively unwound as the session wore on and this has continued through the overnight session. Equity market sentiment was positive, although there is still the sense that the US Government could use TARP funds to bailout the US auto companies. It’s difficult to determine to what extent this is propping up the market. In any event the DXY has fallen through further support levels and further USD weakness seems likely.
- The USD remains under some pressure this morning though trading does appear to be winding down somewhat ahead of the holidays. Amid the general gloom – the US auto sector bail out, US retail weakness, Wall St fraud (on a massive scale), bank earnings (MS and GS today) – there were some positive signs; after months of marked declines, shipping rates are pushing up again on firmer Chinese demand for iron ore and coal; there may be some life in the global economy after all, even if Chinese industrial production (November) rose at its weakest pace since 1999. Global equities are a little higher this morning but US futures are in the red. Still, traders are likely to remain focused on the USD and US monetary policy early this week; the two-day Fed meeting is the focus for the markets; that rates will fall is a given – market looks for the increasingly irrelevant Fed funds target rate to fall to 0.50%; the real issue is what the Fed will say (or do) with regard to non-conventional monetary policy. The Fed has been edging towards quantitative easing, without really telling the markets what it is doing and some clarity on future policy prospects seems more than overdue.
- It does seem telling to us that the USD has taken a turn for the worse amid signs that credit (or perhaps more specifically, liquidity) tensions are easing; the USD strength seen over the past 4-5 months reflects short term factors (scarce USD liquidity, repatriation etc) and the decline in LIBOR rates over the past few days (3-month USD LIBOR down 35bps since the start of the month) suggests that liquidity conditions are relaxing; demand for USD funding via the FX market should therefore relax and the market can turn their attention back to the many challenges that are building up for the USD –recession, tumbling disinflation, ultra-low interest rates and the looming jump in borrowing that will result from the various US government support and bail out programs.
USD continues to be sold
December 15th, 2008 · No Comments
Tags: FOREX Market Commentary
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