Intraday Market Thoughts Archives

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The selling deluge continues as the bears shrug off remarks from presidents, policymakers, and every rescue package in sight. Dow retest the 8,000 level while S&P500 nears 840. The White House has just issued a statement indicating no plans to shut the financial markets in the face of the escalating sell-off. Markets in Russia, Brazil, Indonesia and several others have all shut today to alleviate the effect of the selling. VIX index soared to 72.44, the highest since the intraday high attained during the Asian crisis. The Major players remaining in the markets are those behind forced liquidations and redemptions. We're once again likely to see renewed JPY and CHF gains towards the afternoon as was the case in the last 10 days.

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Asian stocks getting crushed after the selling deluge in Wall Street moved into capitulation stage. This is triggering prolonged multiyear highs in the low yielding currencies, while damaging the high yielders such as AUD, GBP and NZD. My Thursday morning piece to clients was titled "Sterling Still the Major Loser" preceded further losses in the currency. As we speak, GBPUSD has broken below its 2- year lows hitting a 5-year low of $1.6896. GBPCHF slumps to a 12-year low of 1.900 as the Swiss franc flexes its low yielding safe haven against the deteriorating low high yield sterling. So which is doing better? Swissie or Yen? The Swiss Franc has tumbled to 86.53 yen, the lowest since August 2005. This comprises a 7% decline this week and an 18% drop from its June record high. But aside from favoring JPY and CHF against GBP, AUD and NZD, using USD as a low yielding play against GBP and AUD remains rewarding in the short term especially as a hedging strategy against shorting USDJPY.

The correlation between equities and high yielding currencies remains extremely high, highlighted by the sharp decline in GBPUSD drops by more than a full cent to $17220 as US equities move from +1.4% to -1.0%. Same applies for Aussie and Yen crosses which lose over 2 yen across the board including USDJPY, AUDJPY to EURJPY. The ban on short sellers has proven to be no obstacle to a falling market. Now that the ban has expired today, prospects are dismal for stocks. This is the biggest Year-to-Date decline in the major equity indices in history.

Despite the euros recovery yesterday, sterling persisted on the downside, reaching a fresh 34-month low against the dollar. The Bank of Englands 50-bp rate cut may have been forced by a coordinated move, but it also heralds the beginning of series of rate cuts. We expect the BoE to reduce its base rate by an aggregate of 75 bps to 3.75% by year-end from the current, and extend towards 3.25% by end of Q1 2009. Todays BoE MPC meeting was cancelled in light of yesterday's rasing, thus allowing room for fresh easing in November. With EURUSD stabilizing relative to GBPUSD, EURGBP pushed to as high as 0.7955, facing 0.80 as an interim resistance. Cables resistance drops from $1.77 to 1.7450, at which point its expected to draw fresh sell orders for an attempt onto $1.71. We're even seeing a sharp recovery in the Aussie against Sterling, which could extend to as high as 0.4250 from the current 0.4090 and yesterday's 0.37.

Australian jobs figures at 8.30 pm EST (12.30 am GMT) expected to show a rise in the September unemployment rate to 4.3% from 4.1% and a decline in jobs to 0K from 14.6K. AUDUSD recovers from a 5-year low of 0.6438 to 0.6670s but remains clearly in a negative bias as markets remain in critical care following further global erosion despite the global rate cuts. Asian stocks down across the board, which could prompt fresh declines in AUD pairs. Symmetrical triangle on hourly AUDUSD, facing resistance at 0.6750, followed by 0.68. Interim support stands at 0.6620, followed by 0.6580. Accelerating selling in equities coupled with a potentially negative reading in Aussie payrolls could call up 0.6500.

103 YEN NEW RESISTANCE: USDJPY drops below the 100-yen level for the first time since April as the global market deleveraging rises to new heights despite todays coordinated rate cuts. From a short-term perspective, we could see renewed equity gains during the US session, which could once again flounder later in the session and force renewed losses back to as low as 97.00 later in the month. We mentioned in yesterday's article that further deleveraging as measured by NYSE margin debt usage is a reflection of the considerable leverage accumulated during the last bull market is now forcefully being undone by a powerful combination of margin calls and accelerating market losses, triggering broad ripples of sell orders among large and small investors. 103 yen is to become the major short term resistance in USDJPY, as bears produce lower highs. Interim resistance stands at 101.70, with support starting at 99.30, backed by 98.70.

Markets erase all of their post-coordinated cut rally, while USDJPY dips below 99.80 and cable drops below $1.7450. Stocks sell off aggressively in line with yesterday's warning about margin deleveraging. The rate cuts are in line with our long-held expectations for the global reflationary trade to emerge as the cost of money (interest rates) is reduced to the benefit of gold prices and the expense of oil. The gold to oil ratio rises to 11.5 (gold at 920 oil at 80) from 6.5 earlier this summer. Recall the 38-year monthly average stands at 13, therefore further rebound in the ratio is in line with prolonged gold gains towards $1100 per ounce before year-end. I warned on Sep 18 in this site that further increases in gold relative to oil are a typical characteristic of contractionary economic conditions. The mean-reversion process will ensue, sending gold above $1000.

GLOBAL CENTRAL BANK RATE CUTS. Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank cut their overnight rate by 50 bps. Central banks were forced to finally ease rates after globalo equity markets had opened the day in extremely negative territory; Nikkei was down 10% (biggest single day decline since 1987), Russia's Micex shut until October 10th. YEN CROSSES Have rallied but are already losing those gains, with USDJPY already testing below 101 yen towards 100 yen. Liquidity remains dry in currency and credit markets. Gold rallies to $915 per ounce.

UK NIESR estimate for GDP at -0.2% from previous -0.2%. The NIESR urges Bank of England on a 50-bp rate cut this Thursday. Separately, Sep Nationwide consumer confidence fell to 50 from previous 53. GBP markets are bracing for Wednesday's 50bn rescue package by the UK govt to rescue UK banks, which includes partial nationalisations with taxpayers' money. Will the program prove to have little effect as the TARP program in the US? Sterling joins high yielders in selling off during Asian session following the fresh 5-year lows in US equity indices. Once again, markets seem to have only one thing on their mind and that is interest rate cuts. Anything less has shown to be insufficient. I stand by this morning's article on NYSE margin debt predicting another 20% decline in US indices.

Stocks drop to their lows of the day as Fed Chairman Bernanke's speech shows no hint of a rate cut. Dow -224 pts to 9,727, S&P500 -27 pts tp 1,030. JPY rises across the board while USD strengthens on renewed risk aversion. USDJPY drops from 102 to 101.60s, Cable drops from $1.7540 to $1.7450, eyeing $1.7410. Thus, we may see stocks revisiting yesterday's 5-year lows. The 2pm EST release of the FOMC minutes is unexpected to garney much interest especially as Bernanke is present today speaking about the latest events. UK's NIESR GDP estimate andOct Nationwide consumer confidence index both due at 7 pm EST.

Fed Chairman Bernanke's crucial speech at 1pm EST on the "Economic Outlook and Financial Markets" is likely to confirm a contraction in economic growth in Q3, and signal a rate cut for the October meeting. Reports that Iran has forced a US plane to land there were denied by the US Pentagon. US equities seen opening higher on the back of the Fed's announcement to support the commerical paper market. Carry trades seen driving AUDJPY to 75.90, USDJPY to 103.40s, GBPJPY at 182.30 and AUDUSD to 0.7350.

The bigger than expected 100-bps rate cut from the Reserve Bank of Australia had a temporary effect in stemming risk aversion and shoring up carry trades in favor of high yielding currencies at the expense of the USD and JPY. But reports on RBS, Barclays and Lloyds each had sought about 15 in capital, brought back sterling from a session high of $1.7650 to a fresh 2 1/2 year low of $1.7418. As stocks in these banks plummeted by over 30%, risk aversion bounced back, dragging USDJPY, AUDJPY, AUDUSD and EURUSD. The fundamental data also weighted on sterling after UK industrial production fell 2.3% y/y in August from a 1.9% decline the prior month, bolstering chances of a negative Q3 GDP reading and confirming chances of at least a 25-bp rate cut from the Bank of England this week. Despite the existing dissent from the hawks at the BoEs Monetary Policy Committee, we expect a 50-bp rate cut to 4.50% mainly due to the expected contraction in Q3 GDP following a flat reading in Q2.

RBA surprises with a 100-bps rate cut to 6.00% from 7.00%, versus expectations of a 50-bps rate cut. Aussie extends Monday's 10-13% selloff on the significant rate cut, AUDUSD targets 0.70 cents, AUDJPY seen targetting 72.20 yen. The resulting selloff in AUDJPY is not as deep as other AUD pairs because the move is shoring up risk appetite at the expense of JPY.

USDJPY, AUDJPY and GBPUSD show similar trend line resistance in their 2-hour charts. All 3 pairs rallied late in the US session as US equities bounced off their lows of the day. But the trend line resistance in continues to hold in each of these pairs; USDJPY (102.50), AUDJPY (0.7580) and GBPUSD (1.75). Renewed deterioration in Asia to trigger fresh losses in the pairs. AUDUSD and AUDJPY were the major losers of the day as markets have fuelled expectations of a 50-bp rate cut in this evening's RBA interest rate decision--11.30 pm EST (3.30 am GMT). Sharp equity losses may ensue in event of a 25-bp cut.

Stocks sell off to 5-year lows interrupted by a series of intra-day rallies resulting from talk of an emergency G8 meeting. AUDJPY plunged 13% to a 5-year low. Yen longs are once again urged from any Fed action on interest rates, which could give a short term but powerful boost to yen pairs. AUD awaits the Reserve Bank of Australia decision (11.30 pm EST) widely expected to produce a 25-bp rate cut to 6.75%, but a 50-bps rate cut carries heightened possibility, in which case would re-accelerate further lows in the currency. AUDJPY lows stand at 70 yen, but whipsaws from rumors and central bank action may lift the pair to as high as 74 yen. GBPUSD capped at $1.7580.

RFLATIONARY TRADE: The fact that gold prices have gained $30 to $861 per oz despite the dollars rally and oils tumble below $90 per barrel reflects credit markets anticipation of the global reflationary trade, which would be triggered by a new bout of central bank easing. The currency impact of such a move would be beneficial for the US dollar at the expense of European currencies on the argument that rate cuts overseas may have more to go. rate cuts would unleash sharp rallies in AUDJPY, EURJPY, NZDJPY, and to a lesser extent a boost in USDJPY. Fed funds futures now pricing 80% chance of 50-bps cut in October meeting, but I expect the Fed to move as early as this week.

Classic case of deleveraging and Forex unwinding of carry trades is underway as Asian markets tumble after Friday's capitulative following Wall St despite the passing of the TARP package by both Chambers of US Congress. USDJPY plummets 2.5% or 330 pips from Friday's close, sending other yen crosses into damage territory. Dollar also starting to lose ground vs CHF but remains firm against other high yielders. EURUSD drops 240 pips to 1.3600 (lowest since Sep 2007) now facing 1.3580 as next support, which is the high from January 2005. The week's Data Calendar will give way to FED SPEECHES, seen hinting at October rate cut. Fed Gov Evans and Dallas Fed's Fisher to speak on Monday, followed by Bernanke and Stern on Tuesday, and Plosser (Philly) on Wed, and Stern and Rosengren (Boston) on Thursday. Hawks such as Fisher and Stern will lighten their anti-inflation focus, and that should signal the much awaited rate cuts.