All financial markets were roiled last week, and this morning, as the flames of volatility were stoked by fear, speculation, and uncertainty stemming from unprecedented market events and developments. The Dow Jones Industrial Average saw its single largest point drop in a day (-778 points) last Monday after the US House of Representatives failed to pass legislation approving the historic $700B “bailout plan” proposed by the US Treasury. Currency markets followed suit, as the greenback desperately sought to find firm footing amidst turmoil that was further exacerbated by unfolding drama in the banking sector.
USD – All financial markets were roiled last week, and this morning, as the flames of volatility were stoked by fear, speculation, and uncertainty stemming from unprecedented market events and developments. The Dow Jones Industrial Average saw its single largest point drop in a day (-778 points) last Monday after the US House of Representatives failed to pass legislation approving the historic $700B “bailout plan” proposed by the US Treasury. Currency markets followed suit, as the greenback desperately sought to find firm footing amidst turmoil that was further exacerbated by unfolding drama in the banking sector. The ongoing tug-of-war battle between Citigroup and Wells Fargo over the fate of struggling Wachovia Bank has left market participants pondering the extent of involvement required by the FDIC to stabilize the credit markets. Much in the same way that US equities undulated along a rollercoaster trajectory during the past several days, the greenback also experienced wild volatility, spiking to multi-week highs one moment, and dropping to multi-month lows the next. The dollar this morning extends its gains vis-à-vis the euro and some of its other major world counterparts, though it experienced a precipitous decline relative to the JPY. Last Friday saw the eventual Congressional approval of the Treasury “bailout (read “rescue”) plan”, though a worse-than-expected NFP reading (-159K in Sep.)—marking the ninth consecutive month of job losses—ostensibly negated the anticipated euphoria stemming from the approval of the Treasury financial package. With a string of deplorable economic data releases last week, namely in the manufacturing and labor sectors, Fed Fund futures are now fully pricing-in a 50-bps rate cut at the October 29 FOMC meeting. ISM Manufacturing fell to 43.5 in September (vs. 49.9 prior), while Initial Jobless Claims rose to its highest level in a decade to 497K during the final week of September. With Factory Orders also dropping (-4.0% in Aug. vs. +1.3% prior), the reality of a recession for the world’s largest economy has all but been confirmed. Markets will have plenty over which to ruminate this week with an economic calendar chock- full of event risks.
EUR – The euro hit fresh 13-month lows amid a global crisis of confidence in financial markets. Euro hit lows at 1.3523 on growing fears that Europe will suffer the same financial meltdown that has toppled America’s largest financial giants. Germany announced a nationwide “umbrella” to protect its banking sector encompassing consumer deposit guarantees and funds for distressed banks. The move comes after the government rescue of German lender Hypo Real Estate after private sector attempts to shore up the ailing bank by a consortium of financial institutions failed. The measures are an abrupt reversal from last week in which German authorities declined to take part in a US style rescue for Eurozone financial institutions. The crisis gripping financial markets comes amid a slowing E-15 economy which threatens to exacerbate the slowdown. The lack of a coordinated Eurozone response to shore up its financial institutions is likely to support the dollar and US safe haven flows until market confidence is restored.
JPY – Amid mounting losses on Wall Street and overseas equity markets, the yen rallied this morning hitting fresh multi-month highs against the major currencies, hitting 100.26 against the dollar. The brief collapse of USD vs. JPY this morning was the greenback’s biggest one-day decline in 10 years. Fears over the deteriorating global financial system have prompted many investors to exit risky “carry-trades”. Meanwhile, Japan’s Nikkei stock index slumped 4.25% on Monday—it’s lowest since February 2004—and the need for stability also drove-up Japanese government bond prices. The BoJ is expected to maintain its key interest rate at 0.50% after its policy meeting concludes tomorrow. Absent noteworthy improvements with the US financial markets, and lingering risk aversion, JPY is likely to continue its rally and pierce through the key 100-level.
GBP – Sterling experienced a precipitous decline against the USD as ongoing and protracted fallout from the global financial crisis deepens. The pound breached its largest quarterly loss vs. the USD since 1992, reaching a low of 1.7714. The BoE offered $10B in overnight funds last Monday as part of an emergency action coordinated with other global central banks to ease tension in money markets. Growth in virtually all sectors, including manufacturing and housing, declined with the Chartered Institute of Purchasing and Supply’s index dropping to 45 in September, from 45.9 in August, which was the lowest since December 1998. Declines in crude oil have weakened the pound as well dropping over 6%.
CAD – The loonie proxied with crude last week giving up 6.76% vs. the USD for a high/low of 1.0827, posting the largest weekly decline since 1971. In an effort to relieve their own liquidity crisis the BoC lent commercial banks and brokers C$4B for 28 days to help ease the global credit shortage. Canada joined worldwide counterparts to try and restore normal lending between financial institutions.
MXN – The peso fell to its lowest level in four years as the global financial crisis spreads to Europe. The peso fell close to 6.0% while the local IPC stock index dropped more than 8.0% on reduced demand for emerging market assets.
CNY – The Chinese yuan fell against the dollar to 6.8432. The currency has fallen less steeply vs. other Asian currencies due to the government’s policy of managing the exchange rate. In a reversal of the yuan strength trend, the market is calling for a 4.18% depreciation of the yuan in 12-ms. per the NDF futures market.