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G7 Rescue Plan Boosts Confidence - Is the Worst Behind Us? (Euro Open)

Monday, 13 October 2008 05:55:07 GMT  |  Ilya Spivak, Currency Analyst

The Euro and British Pound rose as forex traders saw confidence rebound following the unveiling of a coordinated financial markets rescue plan at the weekend’s G7 summit. A meaningful rebound in risk appetite will likely see the US Dollar come under continued selling pressure, though interest rate expectations continue to favor the greenback in the longer term.

Key Overnight Developments

• US Dollar, Japanese Yen Fall as G7 Rescue Plan Boosts Confidence
• New Zealand Retail Sales Rise on Rate Cuts, Cheaper Oil


Critical Levels 



The Euro gapped higher 161 pips higher as traders sold US dollars bought amid sweeping risk aversion of recent weeks. The reaction in the Sterling was a bit more subdued, with GBPUSD gapping only 64 pips above Friday’s close to start the trading week.


Asia Session Highlights 



Forex traders sold US Dollars and Japanese Yen in the overnight session as confidence rebounded following the unveiling of a coordinated rescue plan at the weekend’s G7 summit. Finance ministers from the world’s top economies surprised the skeptics, coming together to issue a joint 5-point plan aimed at freeing up the gridlock in global credit markets. Asian stock markets rose, with both Australian and Hong Kong shares trading notably higher (+3% and +4.5%, respectively). US equity index futures also added an average of +3.5%.

New Zealand’s Retail Sales grew 0.4% in August, a stark improvement from the -0.7% contraction seen in the preceding month. Cheaper oil and dramatic interest rate cuts boosted consumer sentiment: crude has fallen over 45% to date since peaking at $147/barrel in mid-July while the Reserve Bank of New Zealand surprised with a 0.50% rate cut, the first in 5 years. The RBNZ is scheduled to announce rates again next week, with trading in overnight index swaps suggesting that the markets expect Alan Bollard and company to cut rates by an additional 100 basis points. Longer term, markets are pricing in at least 200 basis points in monetary easing over the next 12 months. 


Euro Session: What to Expect



France’s Current Account is seen showing a shortfall of -4.0 billion euro in August, widening from the -3.8 billion euro in the preceding month. Last week, traders saw the trade balance portion of the metric post a wider-than-expected -5.4 billion euro deficit as imports growth outpaced exports by a full percentage point. The capital side of the equation may help to offset things a bit but the net result still points to a negative reading: the CAC 40 benchmark index of French stocks rose 3.2% but the 10-year bond lost -2.9% while the Euro was down a whopping -6%.

Switzerland’s Producer and Import Prices are expected to ease to 3.9% in the year to September from 4.0% in the preceding month, owing mostly to the sharp decline in the price of oil. Indeed, crude has fallen over 45% to date since peaking at $147/barrel two and a half months ago. The release will mark the second consecutive month of slower producer inflation since the metric peaked at 4.9% in July. A similar dynamic is expected for the UK Producer Price Index, though consumers will not capture all the savings from lower production costs as the prices of final goods (seen shedding -0.4%) understate the savings to manufacturers (seen down -1.2%).

On balance, forex price action is likely to be closely linked to how the G7 rescue plan is treated on European stock markets. Should confidence remain supported, traders are likely to see a continuation of Asia session trends. A meaningful rebound in risk appetite will likely see the US dollar come under continued selling pressure in the coming weeks as capital reverses course having poured out of higher-risk investments and into long-term US treasury bonds. However, the longer-term perspective continues to favor the Dollar as priced-in interest rate expectations point to the greenback gaining at least 150 basis points on the Euro and 175 basis points on the British Pound over the next 12 months.


Related Articles:

US Dollar, Japanese Yen Fall as Traders Embrace G7 Plan to Shore up Credit Markets
G7 Issues Joint Statement On Addressing Financial Crisis


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

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