daily brief

Euro and British Pound Drop As Lehman CDS Deadline Increases Dollar Demand

Tuesday, 21 October 2008 09:41:48 GMT  |  John Rivera, Currency Analyst

The Euro fell to its lowest level in nineteen months as the appetite for dollars was fueled by today’s deadline for settlement of Lehman Brothers CDS’s. Rumors are that banks and other sellers are hoarding cash to payout a estimated 91% loss on the investments.

Talking Points
• Japanese Yen: USDJPY Drops Below 101.30 as Risk Aversion Lingers
• Pound: Drops To 1.700 Before Finding Support
• Euro: France’s Infuses 10.5 billion Euros in Banks
• US Dollar: Possible Fiscal Stimulus Plan Spurs Bullish Dollar Sentiment

Euro and British Pound Drop As Lehman CDS Deadline Increases Dollar Demand.

The Euro fell to its lowest level in nineteen months as the appetite for dollars was fueled by today’s deadline for settlement of Lehman Brothers CDS’s. Rumors are that banks and other sellers are hoarding cash to payout a estimated 91% loss on the investments. Meanwhile, France’s government announced the investment of 10.5 billion euros in the country’s largest banks including BNP Baribus SA, Societe Generale SA, and Agricole SA.

The Euro would fall to as low as 1.3210 before finding support as demand for dollars and the outlook for further easing from the ECB increased. Indeed, comments today from central bank members Juergen Stark and Jose Manuel Gonzalez-Paramo where they called for inflation to ease faster than expected as growth slows. The dovish comments from the policy makers are a significant break from the staunch hawkish stance and focus on price stability. The comments may signal that further easing from the ECB could be forthcoming as the MPC tends to signal their next move. Expectations for a rate cut are at their highest levels according to Credit Suisse overnight index swaps which are pricing in 138 bps of rate cuts.

The Pound continued its losses from yesterday as it fell another 20 bps to 1.7000. The GBPUSD found support at the psychological support level but could fall further with the 10/10 low of 1.6779 as a possible target. Tomorrow’s BoE minutes may be the catalyst for another move lower as we get insight s into the central bank’s concerns and the possibility if future easing. We expect that the vote was unanimous which would signal that the MPC has finally abandoned their concern regarding inflation and that efforts to promote growth will now dictate future policy decisions.

A barren U.S. calendar will leave the dollar’s fate to the appetite for U.S. assets. The greenback’s recent rise has been in part due to a flight to safety due to the credit crisis and France’s cash infusion in to their major banks may be perpetuating these fears. However, before the peaking of the credit crisis the dollar was receiving support as the U.S. economy was viewed as the best positioned to emerge from the current downtrend. We may be seeing that paradigm coming back into play as the U.S. continues to be proactive in promoting growth as demonstrated by Chairman Ben Bernanke support of a second fiscal stimulus. Despite the declining fundamentals in the U.S. and expectations of another rate cut, Europe is still viewed as behind the curve regarding the current downturn which will keep the dollar supportive over the medium-term.

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Related Articles:
ECB to Ease Policy Further as Inflationary Concerns Subside

Overnight Interest Rate Update 10.21.08

Euro-Dollar (EURUSD) Gives Back Ahead of Lehman's CDS Settlement

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