Risk Appetite Dictating the Pace in a Very Emotional Market

11/24/2008 12:00 am EST

Focus: FOREX

Brian Dolan

Chief Currency Strategist, FOREX.com

Risk appetite continued to dictate the pace in very emotional markets this week. US stocks got decimated by nearly14% as a supposed deal to bring relief to the US automakers and speculation that a large US bank would be split up and sold never materialized. The S&P 500 took out the 2002 intraday low and made a fresh 11-year nadir just above the 741 mark as we write. The buck was once again the beneficiary of this flight to safety, and the USD index jumped 2% on the week.

The price action in FX was in line with the move back into risk aversion as well. JPY crosses followed global equity markets lower. USD/JPY shed about -230 pips for the week, and was sitting near 94.80/90 while EUR/JPY saw more dramatic selling and sank about -350 points towards the 118.90/95 zone. The downside is likely to persist while below 96.50 and 123.00, respectively. EUR/USD was down a modest -70 pips on the week towards 1.2530/40 as the action in the JPY crosses kept the volatility here relatively mild. We would expect the trend lower to persist while below 1.2650/1.2700 here.

Treasury Auctions and Auto Bailout Key for the Buck’s Direction

In terms of gauging the direction of the USD going forward, upcoming Treasury auctions and the outcome of the US automakers’ problems should be closely watched. The recent rally in US treasuries is testament to the allure of US assets in an uncertain global landscape. The two-year note fell below 1% this week for the first time ever, while the shorter term, three-month bill plunged to 0.01%—the lowest since 1940. This flight to US paper has helped keep the buck supported, and thus a positive outcome in the upcoming auctions should continue this trend.

The automakers’ problems look more and more likely to be resolved prior to the Obama administration taking office. Congress continues to push for some sort of plan, while Obama’s transition team has drawn up a prepackaged bankruptcy plan for the big three. Failure of the automakers would likely be devastating to the US economy—at least in the short run—and would likely push forecasts for 2009 unemployment and growth to gloomier levels. While a plan towards viability would initially see the USD lower as risk appetite increases, we would look for an improvement in US economic fundamentals to give the buck a nudge higher on the follow.

Key Data and Events to Watch This Week

The US economic calendar is busy in the upcoming holiday-shortened week, and Monday kicks things off with existing home sales. Tuesday sees 3Q preliminary GDP, the Case-Shiller home price index, and consumer confidence on tap. Wednesday rounds out the week, and is ultra busy with durable goods, personal income/spending, core PCE price index, initial jobless claims, the Chicago PMI, University of Michigan confidence, and new home sales. US equity markets are closed for Thanksgiving on Thursday, and Friday has nothing on the agenda.

The euro zone is jam-packed with economic events. Monday starts it off with EZ current account, German IFO, and EZ industrial new orders. Tuesday sees German GDP, German GfK consumer confidence, French business confidence, and French housing starts. Wednesday has German import prices, French consumer confidence, and German consumer prices on tap. On Thursday, we get German employment and EZ business/consumer confidence, while Friday closes out the week with French producer prices, EZ consumer price estimates, and EZ unemployment.

Japan sees a pretty busy calendar as well, but the action on the data front doesn’t start until Thursday. That day sees employment, consumer prices, industrial production, and retail trade. Friday follows up with small business confidence and housing starts. Also look out for the BOJ monthly report on Tuesday, and the minutes to the monetary policy meeting on Wednesday.

It is a rather slow week in the UK, and it kicks off with business investment on Tuesday. Wednesday has GDP and the index of services lined up. Friday rounds out the week with GfK consumer confidence and the CBI distributive trades report. On the policy front, watch for BOE members King, Gieve, Bean, Barker, and Sentence all testifying on Tuesday.

Canada also sees a characteristically slow week ahead. Tuesday sees the all-important retail sales report, while Friday closes out the action with the current account and industrial product prices.

The action down under is on the light side. New Zealand trade balance kicks it off on Wednesday. Thursday sees Australian private capital expenditures, New Zealand business confidence, and New Zealand building permits. Friday closes it out with Australian new home sales.

By Brian Dolan of Forex.com

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