The US$ remains under significant pressure as the market remains focused on the weak fundamentals attached to the greenback. With the US credit markets remaining under significant pressure as the fallout from sub prime defaults rattle markets, traders remain focused on this ever-tightening credit environment. This has led to several major US banks reporting severe financial distress as their ability to raise capital has diminished significantly. This backdrop has led traders to speculate that the Fed will be forced to cut rates when it meets on December 11th. The US Central Bank is expected to lower rates 25 basis points as it responds to the worsening credit environment. There was some relief offered to this tightened credit environment overnight when Abu Dhabi Investment Authority announced that it was taking a $7.5 billion position in Citigroup. This large cash infusion will help shore up the balance sheet of this credit-distressed institution. On a negative note however, the news of this bailout reveals the relative weakness of the greenback and the opportunities the distressed US economy is presenting to foreign investors. Look for this trend to continue for some time as the current environment presents ample buying opportunities for foreign investors. This investment in US businesses could provide some short-term lift to the US$, however, expect the market to remain focused on the weak economic environment and declining US interest rates. The market will focus on the release of Consumer Confidence at 10:00 a.m., expected to decline to 91.0. The recent declines in housing markets coupled with an ever-tightening credit environment seem to continue to weigh on the consumer. Expect this figure to have little effect on the overall direction of trade, barring any strong deviation from forecast.
The euro gained overnight after the release of much better than expected data from Germany. The Munich based Ifo research center reported that business confidence rose unexpectedly in October to register 104.2 vs. expectation of a 103.3 reading. In addition, consumer prices increased in two German states, pushing above the 3.0% level for the first time in over six years. With increased business confidence and mounting inflation, many traders who had discounted an ECB rate hike before year-end are now speculating that the Eurozone Central bank will again be forced to push rates higher. This environment of robust growth and increased prices pressures will continue to support the euro as the ECB will all but certainly be pushing rates higher. This position is in stark contrast to the US Fed that is now in a defensive rate cutting posture. Expect this environment to continue to prop the euro as investors flock to the common currency.
The yen fell overnight as the carry trade remerged amidst an environment of increased investor risk. News released overnight that the Abu Dhabi Investment Authority was taking a large stake in Citigroup, has seemingly reinvigorated investors as they look to position aggressively in higher yielding assets. Also helping push the yen lower was news that several large Japanese investment trusts were looking to raise $6 billion for funds aimed at investing in assets outside of Japan. With the reemergence of the “carry trade” and a seeming shift of capital away from Japan the yen has again come under pressure. However, expect these yen declines to be ultimately limited, as investor aversion to risk will likely prevail through the end of the year keeping the “carry trade” somewhat in check.
The pound traded in mostly flat ranges overnight as dueling factors appear to be steering sterling. High UK rates continue to attract investors as the “carry trade” reemerges. However, with some uncertainty still surrounding the health of UK banks and the overall strength of the housing market, several analysts have begun to speculate that the Bank of England will soon be forced to push rates lower. These diverging factors will keep sterling in wide looping ranges for some time.
