Bailout plan negotiations hurt USD as Bush warns of recession.

President Bush warned of an impending recession at a Wednesday’s night address if Congress doesn’t act quickly and approve the $700b bailout plan. Two major concessions were offered, the first relating to limiting executive pay of the firms and the second that taxpayers would get an equity stake in the rescued firms. Although optimistic comments were made that an agreement could be reached today, it seems inevitable that negotiations will continue, and will keep adding to the USD’s woes.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in another ‘volatile’ trading range ahead of Congress decision on the $700b bailout package.

FX Heatmap September 25th, 2008

Market participants are waiting on the sidelines as uncertainty about Paulson’s and Bernanke’s $700b bailout plan develops. Bernanke continued his Congress appearance he supported the USD by declaring that the bailout plan would not create further inflationary pressures, and agreed that if the market is quickly stabilized the Fed could raise rates sooner. Fundamental data continues to deteriorate as the House Price Index came out worse than expected (-0.6% vs. a -0.2% forecast) as homeowners continue to be hit by lower demand and higher costs of housing credit. Manufacturing continues to slow down. The Richmond Fed Manufacturing Index was reported at -18 vs. a previous -16 reading.

Malicious rumors started a bank run on Bank East Asia’s branches. The third largest Bank in Hong Kong saw lines start to dissipate after government regulators eased account holders and Li Ka-shing, one of Asia’s richest men, came to the aid of the Financial Institution by buying its shares. Ties with Lehman and AIG (that were later revealed to be less than 0.2% of assets) drove people to the branches to withdraw funds. This is another example of how Banks reputations have suffered worldwide from the current credit debacle.

The US$ currently is lower against the EUR +0.59%, GBP +0.76% CHF 0.72% and JPY 0.26%. The commodity currencies are stronger this morning, CAD 0.28% and AUD 0.65%. The loonie was range bound as trading is quiet in wait for other world events to resolve themselves. The overall weakness of the USD drove the loonie to appreciate as uncertainty about the Fed’s bailout plan keeps the currency down versus its trading partners. Commodities have given some support for the CAD, but the outlook remains dominated by outside factors as there is little data released domestically other than Governor Carney’s address later today, and that is not expected to have much of an impact.

The AUD (0.8400) has benefited from yesterday’s surge in commodities and talks on the US’s bail out plan seemed closed to reaching an agreement. The RBA issued a statement going on record that the financial system of the country is better prepared to face the global weather storm that other countries. Interest rate differential has attracted investment from funds borrowed in JPY into the high yielding Australian assets.

Crude is lower O/N ($106.34 down -179c). As expected the EIA weekly report came with further evidence of the supply disruptions caused by hurricanes hitting the Gulf of Mexico. Crude stocks fell down 5.9m barrels vs. an expected 4m barrels. Refinery utilization dropped to 66.7% to a new record low (compared to 69.8% after Hurricane Katrina in 2005). The price of crude dropped after investors prepare for lower world demand, although the IMF commented on the price of commodities remaining high even as demand falters. Gold remains bid ($897) as the USD losses ground vs. the EUR, the yellow metal has increased its appeal as an alternative safe heaven investment.

The Nikkei closed at 12,006.53 down -108.5 The DAX index in Europe was at 6,132.90 up +80; the FTSE (UK) currently is 5,131.50 up +35. The early call for the open of key US indices is higher. 10-year Treasury yields gained 6bp yesterday (3.86%) and gave it back O/N (3.80%) on concerns that the rescue package may be delayed. Future traders are increasing the odds of a rate cut for the Fed’s Fund Rate (2.00%) on October 29th. The probability of a cut went from 58% on Monday up to 88% yesterday.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza