| US Dollar, Japanese Yen Surge as Geithner’s Lack of Clear Policy Actions Stoke Risk Aversion The US dollar and Japanese yen rocketed higher on Tuesday due to a jump in risk aversion, a threat that has continued to linger in the markets for months. The driver? Comments by Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke failed to suggest that a quick fix for the woes in the credit market was in the works. The reality of the situation is that there is no silver bullet to reverse the damage done to the financial markets, and instead, it will take a significant amount of time to even begin to see a semblance of true stability. Indeed, Mr. Geithner's speech provided more of a broad outline for policy actions, rather than clear cut plans. The first goal was to enact regulations in which banking institutions would have to go through comprehensive stress tests and would subsequently receive capital if needed with a facility that uses funds from the Treasury as a “bridge to private capital.” The second goal was to establish a Public-Private Investment Fund, which would target toxic assets and provide a mechanism for valuing them. The third goal was to expand the Federal Reserve’s Term Asset Backed Securities Loan Facility (TALF) in order to create the Consumer and Business Lending Initiative, which should lower borrowing costs and improve access to small business lending, student loans, consumer and auto finance, and commercial mortgages. | NZD rose to almost 0.54 in Europe prior to the US stimulus announcement, but then collapsed to 0.5250 as the market vented its disappointment. It continues to slump as we write, at 0.52. Offshore news is the main determinant of price this week, in the absence of major domestic data. AUD/USD similarly fell from 0.6730 to 0.6540, and is currently soft at 0.65. AUD/NZD behaved in inverse fashion, falling pre-announcement to 1.2435, but stabilised afterwards at around 1.2480. EUR almost reached 1.31, before turning around to 1.2830. Euro-zone negative news yesterday included rumours (denied) of Russian credit defaults, and UBS’s CHF20 billion annual loss – the largest ever in Switzerland. Euro zone banks are heavily exposed to emerging European credits, particularly in Russia. GBP put in another volatile performance, 1.49 to 1.4450. JPY buying was heavy yesterday, March year end repatriation taking it back to just above 90. US IBD/TIPP consumer optimism edges down from 45.4 to 44.6 in Feb. Consumer optimism was little changed in Feb, with weaker readings for the economic outlook and personal finances questions mostly offset by a jump in the assessment of federal policies. US wholesale inventories down 1.4% in Dec. The steep fall in wholesale inventories in late 2008, including a downward revision to November, adds weight to our view that the stock-building contribution to Q4 GDP will be revised lower. Treasury Secretary Tim Geithner outlined a new Financial Stability Plan, acknowledging that last year’s emergency measures “were absolutely essential, but... inadequate... not comprehensive or quick enough”. The plan could involve up to $1 trillion of funds in a new effort to restore some strength to bank balance sheets. Meanwhile, the Fed announced a new program to spur consumer and business lending, which could also involve as much a $1 trillion, up from $200mn previously announced. Fed chairman Ben Bernanke, speaking to the House Financial Services Committee, said that he was encouraged by the market response to recently introduced credit facilities. He promised greater disclosure around the use of these facilities, and noted that they will be wound down as market conditions improve. |
| Today, a few US trade data are on the agenda. The trade balance is expected to improve further from a deficit of $ 40.4 bln to $ 35.7 bln. However, US trade data recently most often had no lasting impact on currency markets. The focus for EUR/USD trading will again be on the market assessment of the US plans to address the financial and economic crisis. In this environment markets will again take a close look at another Testimony Mr. Geithner before a Senate budget Panel. Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government spreads weighed on the single currency. In a broader perspective, negative headlines on the development of the credit crisis most often had a negative impact on the euro (cf Russia headlines yesterday). The US eco story was also far from brilliant, but the dollar most often took advantage from its safe haven status. Over the previous two weeks, the EUR/USD decline shifted into a lower gear but any attempts to change the trend immediately ran into resistance. Longer-term, we’re not convinced that the dollar should outperform the euro from the current levels. However, already for some time, the market clearly has a euro skeptic attitude. |
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