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US Rescues Citigroup, German IFO Tops Upcoming Event Risk (Euro Open)

Monday, 24 November 2008 05:24:10 GMT  |  Ilya Spivak, Currency Analyst

US authorities announced they would come to the rescue of ailing banking giant Citigroup, investing $20 billion into the firm and saying they will protect the bank from loses on its $300-billion portfolio of mortgage backed securities. The German IFO survey of business confidence headlines the economic calendar in European trading, with expectations calling for sentiment to slump to the lowest in nearly 6 years.

Key Overnight Developments

• US Authorities Step in to Rescue Citigroup Inc
• Euro, Pound Advance against the US Dollar


Critical Levels 



The Euro pushed higher overnight, cementing a foothold above 1.26 and testing as high as 1.2654. The British Pound followed suit, pressing higher to test the 1.4950 level.


Asia Session Highlights 



With no economic data on the calendar, the top item of significance in overnight trading was the US government’s rescue of ailing banking giant Citigroup, Inc. Authorities said they will offer protection against “unusually large” loses on Citi’s $306 billion in mortgage-backed assets. In return, Citi issue preferred shares to the US Treasury and FDIC. The Treasury will also invest $20 billion from the recently approved $700-billion Troubled Asset Relief Program into Citigroup in exchange for preferred stock paying an hefty 8% dividend. The bank agreed to comply with restrictions on executive compensations and implement an FDIC scheme to re-structure mortgages as part of the deal. A joint statement from the Treasury, FDIC, and the Federal Reserve said they will “use all of our resources to preserve the strength of our banking institutions.”

Policymakers also outlined 4 priorities guiding their actions going forward:

1. Secure credit access for households and businesses
2. Ensure prudent investment of tax dollars
3. Help banks attract capital from the private sector
4. Limit the government’s involvement in the financial sector as much as possible

The Japanese Yen (recently a proxy for the market’s risk sentiment) remained fairly quiet at the announcement, with USDJPY dropping just 20 pips as news crossed the wires.


Euro Session: What to Expect 



Germany’s IFO Survey of business confidence is expected to sentiment slump to 88.7 in November, the lowest in nearly 6 years. An accompanying gauge of future expectations is seen sinking to 81.0, the worst since at least 1992 and the lowest on record. The survey is the result of a poll of 7,000 executives. A reading of 100 is considered neutral, with anything below that considered negative and vice versa.

The Euro Zone Current Account reading may see the deficit narrow in September following better results in the analogous metrics for France and Germany, the top two economies in the currency bloc. The trade side of the equation showed a smaller than expected shortfall fueled by the cheaper Euro: the currency has fallen over 20% since peaking in mid-July, making exports from countries in the common market comparatively cheaper all the while depressing Europeans’ purchasing power of imported goods. The capital side is unlikely to be supportive with European equities down 10.9% in September and may offset some of the gains from the trade component.

On balance, Euro price action is likely to continue taking its cues from risk sentiment rather than the fundamentals. DailyFX Quantitative Analyst David Rodriguez noted in this week’s Forex Trading Weekly Forecast that, “Given that the Euro/US Dollar pair ignored confirmation that the Euro Zone is officially in recession, there is little reason to believe that…economic data will do anything to alter the single currency’s short-term prospects.” On the other hand, EURUSD is showing a 94% correlation with the MSCI Index of global stock performance. US stock index futures are pointing cautiously higher ahead of the European trading session while our technical outlook suggests a near-term bullish correction in EURUSD before the dominant down trend regains momentum.


Related Articles

US Dollar, Japanese Yen Outlook May Hinge on US, European Event Risk
Forex Trading Weekly Forecast - 11.24.08


To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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