Bernanke gets help opening the spigot… Euro and Pound rally… Yen to continue to benefit from carry reversals… Aussie $ rallies… And Now… Today’s Pfennig!
Good day…and happy Columbus day! This is an official bank holiday here in the states, so all of the banks are closed, but the stock markets are open. We will have a half day here on the desk to try and catch up with all of the work which has been piling up the past few weeks. The phones are turned off, since it is an official bank holiday, but we will be checking messages and try to get back to everyone as quickly as possible. It is a very unusual holiday, as the banks are all closed with no funds transfers possible, but the stock markets are open. Currency desks are lightly staffed, so we will have to really work to get the trades done this morning. These strange holidays usually can lead to some real market volatility, and with today will probably be another rollercoaster.

In an all out effort to ease the credit freeze, the Federal Reserve recruited help from the ECB, Bank of England, and the Swiss central bank to flood the market with US$. These central banks will auction unlimited dollar funds with maturities of seven days, 28 days, and 84 days at a fixed interest rate. This move is unprecedented, as all previous dollar swaps were capped at a maximum amount while these auctions will be for unlimited funds.

Chuck spoke about these dollar swaps a few weeks ago, explaining that these trades partially account for the huge rally in the US$. Central banks around the world are purchasing US$ to lend out to the markets, at the request of the Federal Reserve.

Policy makers from the G-7 pledged this weekend to take “all necessary steps” to stem the markets’ dramatic slide. European leaders agreed to guarantee new bank debt and use taxpayer money to keep distressed lenders afloat after the worst rout in European’s stock markets in two decades. But they didn’t come up with any coordinated measures, other than saying they need to attach the crisis on a unilateral basis.

Chuck had this to say about the G-7 and G-20 weekend meetings:

“The G-7, G-20 meetings didn’t leave the markets much to go on… They issued a communiqué that said, “The will take the necessary steps to stem Global Financial Crisis” I would think that the markets were looking for something with a little more meat to it, don’t you? I doubt the credit markets are going to magically unlock on that communiqué… And so the beat goes on… ”

The Euro rose the most in three weeks against the dollar in early European trading, moving up over 3 cents from Friday’s low of 1.3259. The British pound also advanced against the dollar on speculation the government’s bailout plan will avert a banking collapse. In the near term, the plans give investors confidence that there won’t be further banking failures. In today’s world, everyone is constantly looking for where the next big financial failure will occur, so the European plan to shore up their banks has led to a pretty good rally in the Euro and Pound Sterling.

The Japanese yen, which has been the best currency year to date traded in a rather tight range right around 100 yen per dollar. Some currency research departments are now suggesting that the yen will rally all the way to 95 as investors reverse carry trades. With the global slump in equities, Japanese investors have started selling some of their more than $1.3 trillion in overseas assets to bring money home. Chuck mentioned that he has seen this before, and wanted me to share the following with readers this morning:

“It has been a very tumultuous week, and I just want to make certain that you are aware of this trading pattern that is existing these days… It is Japan circa 1995-1998, when the Japanese stimulus packages and budget junk didn’t work, and the economy was circling the bowl. But… The yen was rallying to 85! It was a repatriation of the offshore investments to bring home to squirrel away and have “under the mattress” in case things get even more bleak…

Sound familiar? That’s what’s going on right now with the dollar… It’s a “the worse things get in the U.S. buy the dollar, and if it looks like Armageddon won’t happen in the U.S. sell the dollar trend… Nothing more, nothing less…”

Two of the biggest movers over the weekend were the high yielding currencies of Brazil, New Zealand, and South African rand. The Brazilian real was the biggest mover, up over 5% vs. the US$ in the past 24 hours. The rebound in stock market overseas has made investors more comfortable with moving money back into the emerging markets. But this rally could be short lived, as the reality of a global recession sinks in and investors continue to de-leverage their positions. At this point I think it is best to take advantage of rallies in the high yielders to exit and reallocate funds into more ’stable’ currencies.

Two which would fit this description are the Norwegian and Swedish currencies which rose against the euro and the dollar on this weekend’s news. But these gains could again prove short lived, as Norway’s central bank is expected to lower interest rates later this week. Norske Bank pushed forward its regular interest-rate meeting from Oct. 29 to Oct. 15. The bank kept borrowing costs on hold last week while Sweden’s Riksbank cut its main rate a half point as part of a coordinated effort by central banks, including the ECB, to revive interbank lending.

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