Forex Trading Commentary: Contagion Has Spread To European Financial Sectors

Euro

The euro depreciated sharply vis-à-vis the U.S. dollar today (Monday) as the single currency tested bids around the US$ 1.3470 level and was capped around the $1.3705 level. The common currency reached its lowest level since 22 August. European leaders convened over the weekend and decided not to compile a massive coordinated bailout similar to the US$ 700 billion bailout that the U.S. Senate and House passed last week. There is growing talk that global central banks may announced a concerted interest rate but as early this week yet some dealers believe this is highly unlikely. Germany joined the list of countries that have guaranteed bank deposits. European financial institutions such as Fortis, UniCredit, and Hypo Real Estate are facing significant problems.

The Federal Reserve today announced it will offer US$ 150 billion in 85-day credit through its Term Auction Facility and announced it will begin to pay interest on depository institutions’ required and excess reserve balances. The Fed also announced that US$ 900 billion of Term Auction Facility credit will be potentially outstanding over the year end. Significant demand for U.S. dollars remains a major problem for the financial markets. Banks are hording U.S. dollars and three-month interbank lending rates remain above 5.0%, a stark contrast to interest rate expectations that suggest the Federal Open Market Committee will reduce the federal funds target rate by 50bps to 1.50%. Euro bids are cited around the US$ 1.3320 level.

Japanese Yen

The yen appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥100.20 level and was capped around the ¥105.15 level. The pair has not been this weak since early April. The yen’s gains across the board were precipitated by a broad sell-off in Asian and European capital markets that resulted in a precipitous decline in U.S. equity markets. Contagion has spread to the U.K. and continental Europe financial sectors and traders are borrowing less yen to invest proceeds in higher-yielding currencies. Finance minister Nakagawa said Japan is not considering a concerted foreign exchange intervention with U.S. and European authorities. Bank of Japan Policy Board’s interest rate announcement is expected overnight and the central bank is seen as keeping the overnight call rate unchanged at 0.50%. Comments from BoJ Governor Shirakawa will be closely watched overnight. It is possible the BoJ could reduce its Lombard rate in what would be a compromise move. Swap contracts on Japan’s overnight call rate are pricing in about a 60% chance of a 25bps rate cut by early 2009. Prime Minister Aso said he is not now contemplating dissolving Parliament and an early election. Data released in Japan overnight saw August machinery orders off 3.5% m/m.

The Nikkei 225 stock index lost 4.25% to close at ¥10,473.09. U.S. dollar offers are cited around the ¥104.15 level. The euro moved sharply lower vis-à-vis the yen as the single currency tested bids around the ¥135.55 level and was capped around the ¥143.85 level. The British pound and Swiss franc weakened significantly vis-à-vis the yen as the crosses tested bids around the ¥174.10 and ¥87.90 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 6.8430 in the over-the-counter market, down from CNY 6.8485. People’s Bank of China reported it will maintain yuan stability.

British Pound

The British pound depreciated sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7335 level and was capped around the $1.7715 level. Cable reached its lowest level since April 2006. The U.K. government on Friday raised the level of deposits secured under its system to ₤50,000 per person. The U.K. government today announced it has no plans to guarantee deposits fully. RICS reported U.K. construction activity fell at a record pace last month. Cable bids are cited around the $1.7045 level. The euro weakened vis-à-vis the British pound as the single currency tested bids around the ₤0.7700 figure and was capped around the ₤0.7795 level.

Swiss Franc

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1485 level and was supported around the CHF 1.1275 level. The pair reached its highest level since 27 December 2007. The Swiss media reported Swiss National Bank may reduce interest rates by at least 25bps by December. U.S. dollar offers are cited around the CHF 1.1800 figure. The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5385 and CHF 1.9775 levels, respectively.

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