Expert Analysis of Today's Market

• After one of the most tumultuous weeks in financial history, the dollar gained against the yen (but declined versus the other key currencies) and US stocks rose following moves by the Federal Reserve, the Securities and Exchange Commission and the Treasury Department to stabilize the financial markets and shore up confidence in the financial system. The Dow Industrials closed with a gain of 368.75 points. The yen fell against its rivals and recorded the biggest losses against the high-yielding currencies as risk appetite increased. Worries about the US financial markets, while alleviated somewhat, and a volatile currency trading will continue next week.
• The USD/JPY rose on increased risk appetite as US stocks rallied for a second day after the US sought legislation to help US financial institutions clear their balance sheets of illiquid assets and ease credit-market losses. The pair has been trading in tandem with the US equity market, which experienced one of the most volatile weeks. Stocks made a new cycle low earlier in the week, which should be at least a short-term low as it happened on high volume and panic sentiment. Seasonal factors also favor a bottom as September/October usually is a weak period. However, the US economy is fragile and deleveraging will continue. Therefore, we will call it a legislative bottom and keep our short USD/JPY position. There are resistances in the 108 and 110 areas and support in the 104 area.

Financial and Economic News and Comments

US & Canada

• Attempting to alleviate the financial-market crisis, the Treasury Department announced that for the next year it will provide up to $50 billion to insure the holdings of eligible money market mutual funds, and the Federal Reserve expanded lending to commercial banks.
• “The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” Treasury Secretary Henry Paulson said. “This troubled asset relief program must be properly designed and sufficiently large to have maximum impact.”
• The Securities and Exchange Commission (SEC) issued a temporary ban on short sales of 799 financial stocks Friday morning after a similar action in the UK Thursday. Short selling, a bet that a stock price will decline, has often been blamed for forcing prices down in times of financial-market stress.
• Canadian banks are less exposed than their US counterparts to the global credit crisis, Bank of Canada Deputy Governor John Murray said. “Canadian banks have healthy balance sheets and absolute leverage that is significantly lower than many of their international peers,” Murray said.

Europe

• Germany’s producer prices advanced a less-than-expected 8.1% y/y in August, signaling inflation in Germany is easing, after rising 8.9% y/y in July, which was the fastest pace since October 1981, data from the Federal Statistics Office showed. Excluding energy costs, August’s PPI rose 3.5% y/y.

• The European Central Bank lent banks $40 billion for three days to soothe credit markets after the failure of Lehman Brothers Holdings Inc.

Asia-Pacific

• Japan’s leading index, which points to the direction of the Japanese economy over the next 3-6 months, was downwardly revised to 91.4 in July, down from the previously reported 91.6 but above June’s 91.0, the Cabinet Office said. The coincident index, which measures the present state of the economy, was upwardly revised to 103.5 in July from the originally reported 103.3, following June’s 102.4. The lagging index slightly improved to 101.0 in July from 100.7 in June. Overall, the figures indicate a slight improvement in the Japanese economy in July after on a declining trend since April.
• The yen may rise past 100 to the dollar this year because there is “no quick fix” for the US credit-market crisis, formerly Japan’s top currency official Eisuke Sakakibara said. The yen may also strengthen to 130 per euro, he predicted. “We could see more unwinding of yen carry trades because there is no quick fix….There could be appreciation of the yen, particularly against currencies like the Australian dollar and the euro. A stronger yen could be beneficial for Japan,” Sakakibara said.

FX Strategy Update