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US Dollar Surges On Senate Approval Of Bailout Bill, How To Trade US NFPs on Friday

Thursday, 02 October 2008 23:15:17 GMT  |  Terri Belkas, Currency Strategist

While the fundamental aspects of the US economy remain grim, as US factory orders plunged 4 percent, the US dollar has still managed to rally.  Why?

US Dollar Surges On Senate Approval Of Bailout Bill, How To Trade US NFPs on Friday

While the fundamental aspects of the US economy remain grim, as US factory orders plunged 4 percent, the US dollar has still managed to rally. Indeed, the US Senate approved the $700 billion financial-rescue plan, which differed slightly from the one rejected by the House of Representatives on Monday. Tied to it was an increase in FDIC insurance limits to $250,000 from $100,000 and a two-year extension of tax breaks in order to win support from Republicans. As a result, the bill is also widely expected to pass a second House vote on Friday morning or afternoon. As I mentioned yesterday, there is quite a bit riding on this bill, as evidenced by the massive declines in the US stock markets on Monday and if legislators want to maintain any semblance of financial market stability, they will vote in favor of it.

 

Looking ahead to Friday, US non-farm payrolls (NFPs) will be released and the result is anticipated to be extremely disappointing. The majority of the leading indicators for NFPs suggest that September was a month of heavy job losses, and even the figures that could technically argue in favor of a stronger reading aren’t incredibly convincing. As a result, I think the index will show job losses of 100k or more in September. The release of US NFPs can be extremely market-moving for the US dollar. However, we’ve been seeing lately that the reaction of the greenback does not always seem logical, as a weak NFP reading will sometimes be followed by US dollar strength (and vice versa). In fact, US economic data has generally been absolutely abysmal lately, fed fund futures are fully pricing in a rate cut on October 29, and yet the greenback has still strengthened quite a bit versus most of the majors. Why? Signs of recession are popping up all over the place. In the Euro-zone, UK, Japan, Australia, and New Zealand, economic indicators have been extremely disappointing, and with the US recession likely priced in already, the greenback has potential to gain.

 

Related Articles: US Dollar - How Should You Trade Non-Farm Payrolls?, US Factory Orders Fall By The Most In Nearly 2 Years

 

Euro Breaks Key Trendline on Bearish Commentary by ECB President Trichet

The euro fell more than 1 percent against the US dollar, British pound, and Japanese yen on Thursday following the European Central Bank’s monthly policy meeting. The ECB left rates steady at 4.25 percent, but as usual, the key market-mover was commentary by ECB President Jean-Claude Trichet. Indeed, Mr. Trichet said in his post-meeting press conference that the Governing Council had discussed actually cutting rates, though the ultimate decision to leave rates unchanged was a unanimous one. While he went on to note that the Governing Council’s focus is on price stability only, since it is their primary mandate, there had been a reduction in upside risks. With the ECB recognizing that an economic slowdown is taking place, it is clear that indications of easing inflation pressures have allowed them to turn more dovish. This is why we see that Credit Suisse overnight index swaps are now pricing in over 100bps worth of rate cuts during the next 12 months. Looking ahead to Friday, The final reading of PMI services for the Euro-zone is likely to prove to be disappointing while retail sales for the region during August could actually be surprisingly strong, as German spending unexpectedly jumped 3 percent during the same period.

 

Related Article: ECB Keeps Rates on Hold But Euro Falls on Speculation of Rate Cuts Ahead

 

British Pound Falls As Deteriorating UK Credit Conditions Raise Potential for BOE Rate Cut Next Week

The British pound slumped against the greenback on Thursday, but unlike the euro, has yet to break below its early September lows. Indeed, the markets are already well aware that the Bank of England is likely to weigh the option of cutting rates next week given the sharp economic slowdown in the UK and tightness of the nation’s credit markets. The release of the Bank of England’s Credit Conditions Survey and UK home prices did not help Cable in any way though, as both proved to be disappointing. The BOE’s survey of credit conditions for the third quarter showed that UK financial institutions plan to scale back loans to companies and households for the rest of the year. Furthermore, banks reduced the availability of credit and predict that it will become scarcer as risk aversion impairs supply and demand. Meanwhile, Nationwide Building Society said that the average cost of a home plunged 12.4 percent from a year earlier, the worst reading since record-keeping began in 1992. It’s no wonder, then, that the markets are now expecting the BOE to cut rates at their next meeting on October 9, which should weigh on GBP/USD further.

 

Related Article: BoE Credit Survey Disappoints, Projecting Further Weakness Ahead

 

Japanese Yen Rebounds as Risk Aversion Holds Strong

The Japanese yen rocketed across the majors on Thursday as risk aversion remains in the driver’s seat. In fact, the DJIA ended the day down almost 350 points despite the Senate’s vote in favor of the Treasury’s $700 billion bailout bill. The bill had been changed slightly to include an increase in FDIC insurance limits to $250,000 from $100,000 and a two-year extension of tax breaks in order to win support from Republicans. The next big question will be if the bill will successfully pass in the House of Representatives – who voted it down on Monday – when they vote on Friday morning. An approval in the House should be beneficial for the stock markets and thus, negative for the Japanese yen. However, with the credit crisis still hitting the world’s financial markets quite hard, true financial stability is not likely to come soon. This leaves traders highly unlikely to pile back into the carry trade. My long-term fundamental bias for the Japanese yen: bullish.

 

Related Article: How to Trade and Survive in Highly Volatile Markets




Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com

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