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Dollar Rallies But Markets Unsure the US Rescue Plan Will Work (Euro Open)

Monday, 29 September 2008 04:26:26 GMT  |  Ilya Spivak, Currency Analyst

The US dollar rallied sharply as lawmakers finally unveiled a compromise $700-billion government rescue plan to shore up ailing financial markets. However, Asian stock markets and US index futures saw sentiment turn skeptical late into the overnight session, meaning forex traders could see significant volatility as European markets react to the announcement.

Key Overnight Developments

• US Dollar Rallies as US Lawmakers Unveil Rescue Plan
• Cheaper New Zealand Dollar Boost Exports, Narrows Trade Gap
• Japanese Retail Trade Slows in August


Critical Levels




The US dollar rallied sharply as lawmakers finally released the details of the compromise $700-billion government rescue plan to shore up ailing financial markets. EURUSD gapped 64 pips lower from last week’s close at 1.4610 to open at 1.4546 and raced lower to test the 1.45 level. A break lower eyes support at 1.4431, with support-turned-resistance at 1.4551. Sterling fell in with broad greenback strength: GBPUSD lost nearly 150 pips to find a near-term bottom at 1.8270, a pivot level. A break lower sees support at 1.8199, with support-turned-resistance at 1.8342.


Asia Session Highlights



The US government’s financial markets rescue plan was easily the most significant news driving forex price action. As originally proposed, the plan would allow the US Treasury to purchase troubled debt from financial institutions. The Treasury will also have the option to provide insurance for ailing firms rather than buy assets outright. The government would be given non-voting shares in the companies they help to assure that taxpayers make money when they regain value. The deal also requires limits on executive pay as well as breaks up the total $700 billion sum into several payments: the Treasury would get $250 billion right away, another $100 billion subject to presidential approval, and the final $350 billion subject to a Congressional certification of approval. A loophole is built in whereby if Congress does not approve the last portion, the president could veto that decision. In that case, Congress would require a greater-than-usual majority to override the veto. The first round of voting on the measure are said to begin tomorrow.

New Zealand’s Trade Balance saw the deficit shrink for the third consecutive month in August as a falling currency continued to boost exports. The monthly shortfall registered at –NZ$750 million (vs. –NZ$912 million expected), bringing the annualized trade gap to –NZ$4.28 billion. The New Zealand dollar depreciated almost 6% against its US counterpart in August having fallen -21.6% peak-to-trough so far this year. This has made the smaller antipodean nation’s goods comparatively cheaper for overseas buyers. Indeed, exports grew an annualized 34.1% in August.

Japanese Retail Trade saw marked slowdown in August, printing at 0.7% in the year to August versus a revised 2.0% in the preceding month. Consumers have seen their purchasing power shrink as headline inflation has more than doubled wage growth. The world’s second largest economy formally entered into recession after annualized GDP growth shrank for the second consecutive quarter to print at -0.8% in the three months to July. Last week, we saw the Trade Balance fall into deficit on dwindling exports while the newly appointed Finance Minister Shoichi Nakagawa announced the possibility of fiscal stimulus, saying the government will consider cutting taxes and increasing spending.


Euro Session: What to Expect




Forex traders could see significant volatility as European markets react to the details of the US rescue plan to shore up ailing financial markets. Although markets initially welcomed the announcement that lawmakers reached a compromise, sentiment turned mixed later into the session as investors turned skeptical of whether the plan can work as advertised. Equity markets in Japan, Australia and Hong Kong reversed initial gains to fall back into the red, as did US equity index futures.

Key data releases are expected to come in along a predictable trajectory: Euro Zone Economic Confidence is set to decline to 87.2 in September, the lowest in seven years. Acute economic slowdown has been a continuing theme in for the 15-nation currency bloc in recent months, with traders paying acute attention to the European Central Bank interest rate announcement due on Thursday. Bond yield forecasts have shifted in recent days to reflect more aggressive rate cuts from Jean-Claude Trichet and company: the market is now pricing 50 basis points in monetary easing for the first quarter of next year versus the originally expected 25bps. Looking at index swaps, the magnitude of rate cuts expected for the next 12 months tripled since just Tuesday of last week.


Related Articles:

Forex Traders Buy US Dollar as Rescue Plan is Revealed
US Rescue Plan Could Stabilize Overnight Forex Interest Rates



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

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