Forex News & Currency Analysis

• FX: EURUSD sustaining gains above 1.42. Focus might be at the 38.2% Fibonacci retrenchment, 1.4710.

• Fixed Income: Generally it is ranging in big differences. Bunds and Treasuries edging higher, but JGB’s is under pressure.

• Stocks: Horrible sell-off in the US session. Europe and APAC sessions are down around 2%.

• Commodities: Extreme rally in precious metals, gold up +10% (up $85), silver +15% (up $1.5). Crude Oil is 5 bucks higher.

• The spread between the USD Libor Interbank Market Rate and the Feds Funds Target yesterday widened to 443 bps. The median since 2001 is 6 bps. This was a 25 standard deviation move! In other words extremely, extremely extreme. No banks trust each other. Everybody is distrusting their counterparties. This is turning into a downward, negative, self-enforcing spiral.

• Even a Money Market Fund (Reserve Money Fund), which are normally considered extremely conservative, are now “breaking the buck”. In other words, if you put one dollar into one of these, you might risk only having e.g. 98 cents left, although this was supposed to be the safest investment after a normal deposit (or cash). The losses in the Money Market Funds are related to commercial paper from e.g. LEH, which is now going bankrupt.

• The deal with AIG (Fed lends $85B vs. taking over 80 pct. of the company and AIG paying libor + 850 bps. for the loan, which is running for two years. The meaning is that AIG assets will be offloaded to pay off the liabilities. If no one buys into AIG, it will slowly bleed to death and all the counterparty problems that the Fed wished to avoid in the first place have only been postponed. We have seen some companies being interested in parts of AIG, though.

• 1 month T-bills are now yielding -1 bps. (yes, MINUS!). The need for safety is so big that you are now PAYING to park your money in government securities.

• USD Fed Funds vs. 3 month LIBOR has exploded. Apparently, to ensure liquidity into next year, banks are now paying 127 bps. more than libor AND taking a currency risk. This is a 4.6 standard deviation move (so far). Of financial institutions that have come under greater scrutiny of the public eye, Washington Mutual, the largest savings institution in the US, is now looking to sell itself and may find interest from large names.

• FX: EURUSD in an extremely big range, but ending higher. JPY and CHF going a lot higher on risk aversion.

• Fixed Income: 10-years gapping higher. Fed’s Funds Futures: 68% chance of a rate cut of 25 bps today. Options: 11.3% for 50 bps.

• Stocks: Massive sell-off in all regions, down between 3- 5%.

• Commodities: Crude Oil collapsing, down more than 9% since Monday morning. Precious metals are still under pressure.

• Reacting to Wall Street news of Lehman’s filing for Chapter 11 protection and AIG’s growing pains to survive the current financial crisis, the Asian stocks have suffered quite broad and steep losses in overnight trading, with the regional MSCI Asia Pacific Index shedding nearly 5%, in the largest drop since January 22 of this year.

• In the wake of recent turmoil in the financial sector, expectations for today’s FOMC rate decision are divided, with Fed Funds Futures implying a 68% chance of a 25bp cut to 1.75%, while Fed Funds Options are factoring 40.2% chance of a 25bp cut and 11.3% chance of a 50bp cut.

• The demand-side factors are now seen asserting themselves ever more clearly as the fall in crude oil prices has steepened, taking the oil prices below $92, or a 7-month low. From these levels to around $87, stronger technical support can be expected.