Intraday Market Thoughts Archives

US retail sales dropped 0.3% in August while PPI fell 0.9% decline in August PPI, suggesting that inflation pressures may be heading in the same direction as economic growth, supporting my consistent calls (since May) that the Fed will continue easing interest rates later in the year (see my article in MEDIA ZONE) which contested the majority of market pundits' predictions for incoming rate hikes.

RISK APPETITE IMPROVES further after a Washington Post report reveals US Treasury and Federal Reserve are in charge of finding a viable buyer for Lehman Bros. This has led to a last minute rally in Wall Street, giving rise to gains in high yielding currencies GBP, AUD, NZD, all at the expense of the JPY and CHF. But will Friday's US retail sales release help maintain the recent increase in risl appetite (reduction in fear)?

Fed Fed funds futures are now pricing near a 50% chance of an INTEREST RATE CUT before year end, reflecting the sea change in economic fundamentals and market sentiment and in line with our long held calls for such a move. Our rationale has rested on the argument that the heightened weakness on the macroeconomic front (unemployment and consumption) combined with severe credit conditions will overwhelm the inflation priorities of the Federal Reserve, especially as commodity prices resume their declines. We expect the Fed funds rate to drop to 1.50% by year end. But such an easing would only slow down the momentum of the dollar rally rather than reverse it.

RBNZ SURPRISES with 50-BP RATE CUT to 7.50%, sends NZD slumping across the board. NZDUSD faces 0.6520, AUDNZD faces 1.2230.

RBNZ INTEREST RATE ANNOUNCEMENT due at 5 pm EST (9 pm GMT). A 25-bp rate cut to 7.75% is widely expected. Today's 34% decline in New Zealand home sales to a 26-year low in might add to rumblings about a possible 50-bp rate cut but the recent currency damage will likely prevent RBNZ from going with 50-bps.

NZDUSD is expected to resume declines towards the 0.66 figure after 3 days of consolidation around 0.67. Forex traders ay push AUDNZD higher to towards 1.22 and onto the 1.23 resistance. NZDJPY is apt to prolong selling into 70 and 69.20.

EURO battered across the board after the European Commmission joins the ECB in downgrading its 2008 GDP growth forecast to 1.3% from earlier forecasts of 1.7%. $1.38 figure looms large, presenting the 50% retracement of the rise from the 2005 low, and the trend line support from the similar low. GOLD breaks below key $772 support and the 100-week moving average. Next major objective at $730.

Risk appetite stabilizes following Lehman's announcement to sell its asset management unit, helping to push equity indices higher. FX markets respond by driving down JPY across the board, but USDJPY resistance looms at 108.20. GBPUSD.

Falling USDJPY and EURCHF resulting from breakdown in talks between Korea Development Bank and Lehman Bros about potential investment in troubled US investment bank. Lehman's Q3 earnings due 7.30 am EST (11.30 am GMT). Focus shifts to Blackstone and Kohlberg Kravis exploring purchase of Lehman stakes. Will a big US bank step in? US fundamentals data to re-emerge on Thursday with Trade balance and jobless claims, then retail sales, PPI and consumer sentiment on Friday.

OPEC SURPRISES & CUTS OUTPUT by 520K mln bpd, reverting to 2007 production limit of 28.8 mln barrel per day. Oil prices rise by more than $1.00 pb to $104.30. Dollar dropped by over half a cent against EUR w/in mins but is now stabilizing. Looks like OPEC is increasingly concerned speculators will work the other way round, adding to downside pressure in event of a break below $100 pb mark. Fears of intensifying global slowdown and deepening equity selloffs are also highlighting OPEC's worries over demand.

JPY extends gains on escalating equity losses, dragging down USDJPY towards 106.50 objective (mentioned below). Latest article on GSEs pointed out that post-Treasury interventions have seen their market gains shortlived. Monday's GSE bailout generated a rally that lasted one day. Risk appetite remains impaired. Deeper losses seen in Asia. USDJPY eyes 105.00, until relief is seen in next week's FOMC decision.

JPY attempts to regain strength after losing momentum during the Asian session, but FX traders are aware of the currency's revived role in thriving on reduced risk appetite. The currency remains the second best performer (year-to-date and quarter-to-date). Daily chart starting to show head-&-shoulder formation, with resistance/right shoulder at 108.50s, suggesting 107.30 and 106.50 target. The fact that recoveries in US equity indices have become increasingly short-lived after the series of Federal government and Fed bailouts (Bear Stearns, Fannie/Freddie Part 1 and Part 2) is incrreasingly evident.

USD gains vs European and antipodeans (CAD & AUD) but loses ground vs JPY as stocks are off their highs of the day. Gold slips to $800 oz. The speed of declines in EUR, GBP and AUD reconfirms the notion that the USD strength is a result of deepening weakness in Europe and Australia. This suggests that USD strength is re-established regardless of US developments.

GBP, EUR and AUD continue their sharp declines as their weak fundamentals prevail. The currencies had initially jumped in Sunday evening (Monday Asian session) after the Treasury announcement due to a unwinding of risk appetite. GBPUSD eyes $1.7580, EURUSD aims at consolidation near $1.4200 base, while AUDUSD seen capped at 0.8345-50.

US stock futures indicate an opening sharply higher but it is unclear whether these gains are sustained into the end of the session. Recall that on Monday, July 14, the day after the US Treasury announcements to extend a credit line to GSEs, stocks opened higher but failed to sustain them, leading to a rebound in the JPY across the board.