US Bank Rescue plan lacks clarity, fails at confidence.

The much anticipated unveiling of the Bank Rescue plan by Treasury Secretary Tim Geithner left the stock market in negative territory and various analysts wondering if the Secretary should have confidence in the plan before trying to sell it to his fellow Americans. Doing a good job of bashing the current economic climate, Geithner failed to offer tangible solutions and Financial stocks fell as a result. The S&P fell by 4.9% and the Bank Index by 14%.

The road is less obstructed for the Obama Stimulus Package to be approved. Negotiations between the President, the Speaker of the House and the Senate Majority Leader are need to integrate the House bill ($819 Billion) and the Senate bill ($838 Billion) into a single package. President Obama seems optimistic that he will have a consolidated bill in the next couple of days, and that might spur some much needed optimism into world markets.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

Forex heatmap

Even after Russia denied that some financial institutions were seeking debt restructuring the EUR lost further ground after world markets had a negative reaction to the US Bank Rescue plan. The IMF could delay a second tranche of an aid loan to Ukraine if the country does not reduce its deficit to 1% of GDP. The International Monetary Fund will decide on February 15th if it will dole out the second portion worth $1.9 Billion.

The US$ currently is higher against the GBP -0.65% and lower against EUR 0.80%, JPY 0.32%, CHF 0.48% The USD weakened after the flat reception the Bank plan by Tim Geithner received yesterday as investors returned to their risk aversion strategies and looked for a safe haven in JPY and CHF.

The commodity currencies are higher this morning, CAD 0.00% and AUD 0.70%. The perceived lack of a real plan to rescue the US Financial system turned optimism into risk aversion. The loonie depreciated 2.4% and the TSX fell by 2.5% later the currency appreciated O/N. There is also speculation that the Governor of the BOC will cut rates again in March 3rd, the current Canadian benchmark rate is 1.00%.
The AUD (0.6542) has recovered after reaching a one-month high after consumer confidence was reported at a record low Monday and low appetite for high yield currencies. RBA Governor Stevens commented that right now the problems are not too much cross border capital flows and risk taking, but rather too little of both.

Crude is lower O/N ($38.04 up -1.21c) Oil has operated in a short range in expectation for the Stimulus bill. NFP Job losses in the US reduced demand for oil and drove the price down. An approved bill if successful in reactivating the economy would mean an increase in demand of crude. Oil has retreated sharply from historic highs of $150 a barrel last summer. OPEC members announced a production cut in order to boost the price of crude above its current levels, which they claim are not enough to invest in new supply.

Gold ($923) appreciated after breaking the $900 level. The USD has strengthened against the EUR, which reduces the appeal of the metal as an alternative investment, although if the Stimulus Package passes this week it could drive investors to the commodity looking for an inflation hedge.

The Nikkei closed at 7945 down 23. The DAX index in Europe was at 4,507 up 2; the FTSE (UK) currently is 4,211 down 2. The early call for the open of key US indices is lower. The 10-year Treasury yields fell by 2bp (2.79%). Bond prices have dropped in expectation for the plans to sell an accumulated $67 Billion in three year, 10 year and 30 year notes this week. Several factors point to a recovery of bond prices.

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