Financial Bailout Rules Changed by U.S. Treasury

The U.S. Treasury Department announced changes to the $700 billion Dollar financial system bailout. The revised financial bailout plan sparked investor’s fears that the U.S. plan to restore liquidity and reduce the lock-up in credit markets is not having the desired effect. A lack of confidence and an increase in risk aversion will motivate traders to buy Dollars over riskier and higher yielding currencies.

Economic News


USD – GBP/USD Drops to 6-Year Low

Yesterday the GBP/USD suffered sharp losses and hit its lowest level in 6 years. The Cable lost 3.7% to end the day at $1.4893. The British Pound has been badly hurt the past five months from an economy that is operating in a recession and sharp cuts in Interest Rates by the Bank of England (BoE).

BoE Governor Mervyn King yesterday said the drop in the Pound does not come as a surprise, and only further losses could spark a currency concern for the BoE. He also openly endorsed a policy for the further easing of Interest Rates to combat a recessionary environment. Currency traders may see a continued drop in the GBP/USD, potentially to the 1.4400 level.

The U.S. Treasury Department announced changes to the $700 billion Dollar financial system bailout. Funds will no longer be used to purchase bad asset-backed securities, but will instead go to recapitalizing troubled banks’ balance sheets. Capital will be directly invested in U.S. banks as the government will take equity positions to prevent further bank failures. The Dow Jones Industrial Average lost 4.7% of its value today after U.S. Treasury Secretary Paulson’s announcement.

The Dollar was strengthened yesterday by an increase in risk aversion and a drop in Oil prices as traders moved from higher yielding currencies to the Dollar. The revised financial bailout plan sparked investor’s fears that the U.S. plan to restore liquidity and reduce the lock-up in credit markets is not having the desired effect. A lack of confidence and an increase in risk aversion will motivate traders to buy Dollars over riskier and higher yielding currencies.

EUR – EUR Continues its Decline

A flight to safety may have been the cause for the drop in the EUR/JPY. The EUR slid against the Yen yesterday to close down at 119.08, its lowest level in a month, but posted strong gains against the GBP to end the day at 0.8359.

The EUR/USD may find a new resistance line in the 1.2500 level. Yesterday the EUR closed below the 1.2500 mark at 1.2458. This continues the bearish trend for the EUR as a steady stream of negative economic data has sent the EUR lower. Yesterday’s trading session was the third consecutive losing day for the EUR against the Dollar.

Traders may be looking for a reversal of the EUR’s bearish trend with positive news from Germany. Today the German Preliminary GDP is set to be released. German GDP is forecasted to contract -0.2% for the third quarter. A better than expected GDP showing could stop the EUR’s slide against the Dollar and the Yen. But a less than forecasted number could provide more support for further Interest Rate cuts from the European Central Bank (ECB).

Also, ECB President Trichet will speak today, followed by meetings with his U.S. counterpart, Fed Chairman Bernanke. The two are expected to participate in discussions to coordinate monetary policy. In a joint move last month, both the ECB and the Fed simultaneously cut Interest Rates amid the growing financial crisis.

JPY – JPY Positive from Low Risk Appetite and Carry Trade Reduction

The JPY continues its month long run against the Dollar and EUR. Yesterday was no exception as the USD/JPY ended the day at 95.57.

The boost to the JPY may be due to a cyclical rebound that has more to do with other countries, a reduction in carry trades, and a lack of risk appetite. The JPY has seen considerable strengthening the past months.

The massive deleveraging that is occurring has steadily increased the JPY as investors close their carry trades, paying back loans that were taken out in Japanese Yen. As the currency is converted back to Yen, this appreciates the JPY against the Dollar and EUR.

The sudden shift in policy by the U.S. Treasury Department did little to reduce risk in the market. The market is looking for stability. When the Treasury announced its intention to change their strategy with regards to the U.S. financial bailout package, markets accepted this announcement as added risk. This risk factor needs to be countered, otherwise the recovery may be more difficult and the JPY may continue to appreciate.

Oil – Crude Oil Falls to 21-Month Low

Crude Oil continues its decline, settling at $55.24, for a loss of $4 on the day. This puts Crude Oil at a 21-month low. Oil is well below the psychological level of $60. This support line has been broken and sustained.

The quick spike in demand from the Chinese stimulus plan has quickly faded throughout the week as Oil continues to head lower. Demand is weakening amid a period of global economic contraction. The $50 mark for Crude looks to be in sight. Traders that were once bullish on Oil are now unwinding their positions and investing them in Dollars.

There is almost zero evidence to support a reversal of this bearish trend. Today should be no different as the U.S. Crude Oil Inventories report will be released. Traders are also speculating that the International Energy Agency will lower its forecast for global Oil consumption, due to be released next month.

Technical News


EUR/USD
The 4-hour chart is showing that the bearish momentum is back with full steam ahead, as the pair lost more than 400 pips in the last 72 hours. The daily Slow Stochastic is showing no crosses, which indicate the continuation of the bearish trend. Going short appears to be preferable today.
GBP/USD
The moderate bearish price movement continues within the bearish channel which still has yet to be breached. The daily chart’s Slow Stochastic is negatively sloped and the 4-hour chart is also slowly joining the bearish notion. The RSI is floating around the 50 level pointing to the continuation of the bearish movement. Next testing point should be around 1.4800. Going short appears to be preferable today.
USD/JPY
The momentum which was created by the breach through the lower barrier of the channel on the daily chart continues with full steam. The 4-hour chart is still quite bearish, as the daily chart is showing its first signs of a halt. Going short with very tight stops might be a preferable strategy today.
USD/CHF
After touching a base at 1.1800, the pair now consolidates a bit higher at around the 1.1900 level. All oscillators show that the bullish momentum will probably continue. The Slow Stochastic of the 4-hour chart is showing no crosses in the horizon, and the bullish momentum there appears to be intact as well. On the daily chart, this pair is still trending upwards and there are no imminent indications of a reversal. Therefore traders can maximize profits by entering steady long positions.

The Wild Card


Gold

There is a very distinct upwards channel forming on the 4-hour chart. A fresh bullish cross on the 4-hour chart’s Slow Stochastic implies that the bullish correction is quite imminent. The RSI is floating in an oversold territory supporting the notion that there is still more room for the upwards correction. Forex traders can maximize profits by buying on lows and taking advantage of a currently bullish trend.

Written by: Forexyard.com