USD recovers as Auto bailout flounders amid Investor Risk Aversion

Citigroup announced further job cuts, which would bring America’s second largest bank to reduce its workforce by almost a quarter (75,000 lost jobs). The Auto Industry bailout is still strongly debated and unlikely to pass before the current congress, but the coming year could change the outlook for US automakers.

Pakistan has received IMF funding as protests all around Iceland were urging the government to accept the terms from the International Agency, Britain and Netherlands which demanded depositors be repaid according to European Union Law. The Icelandic government accepted the terms and will received the promised aid.

The US$ is stronger in the O/N trading session. Currently it is higher against the most actively traded currencies, in a ‘whippy’ trading range.

Forex heatmap

After last month’s industrial output drop reached levels not seen since 1946, the figure jumped up by 1.3% in October. Headlines and political pundits recovering from the election have concentrated on the Auto bailout debate.

Support for the Democrats agenda might come from across the Atlantic as Germany’s Chancellor, Angela Merkel, will meet with carmaker Opel (part of GM’s European operation) to discuss government aid. The meeting is being highlighted because one in every five Germans works in the auto industry and next year Europe’s biggest economy will hold elections.

The US$ currently is higher against the EUR -0.42%, GBP -0.14%,, CHF -0.25%, and JPY -0.07%. The commodity currencies are weaker this morning, CAD -0.50% and AUD -0.71%.
The loonie declined against its major trading after traders forecast lower oil prices and commodities in general which contribute a large percentage of Canada’s GDP. Dec 9th is BOC last meeting of the year and the Central Bank is expected to cut rates by 50 basis points.

The AUD (0.6463) fell as risk aversion drew investors away from equity markets and high yielding investments. The currency has depreciated 25% since the Central Bank initiated the latest round of rate cuts (5.25%) and traders are pricing a lower benchmark interest rate.

Crude is weaker O/N ($54.50 down -50c). Oil is trading near a 21 month lows as demand is reduced even after an unexpected increase in US Industrial output. OPEC plans to decrease production in an effort to convince the market to stop falling crude prices and has announced a new emergency meeting at the end of the month.
Somali pirates off the coast of Kenya have taken hostage an oil tanker worth $100 million; so far crude prices have not been affected by geopolitical risk. Tomorrow’s IEA stockpile report will probably show an increase in inventories and pressure oil prices to even lower levels.

Gold ($735) fell after the USD advance against the EUR, reducing the yellow metal’s appeal as an attractive alternative investment.

The Nikkei closed 8,328 down 190. The DAX index in Europe was at 4,491 down -66; the FTSE (UK) currently is 4,068 down -63. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 7bp yesterday (3.64%). Bond prices are higher as equity markets tumble and there are lower expectations of economic growth.

The US Treasury supplied the second round of the $700 billion package. So far $158 billion have been allocated to purchase stocks from the 21 banks. Banks continue their unwillingness to lend as shown by the TED spread with has widened to over 200 basis points.

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