SigmaForex Market News

The US government could be taking the phrase 'carpe diem' a bit too far as it took an unprecedented move in seizing Fannie Mae and Freddie Mac in an attempt to save the beleaguered housing market. Financial markets took the news as a positive, removing the uncertainty surrounding both companies' fate as well as that of the housing/credit market. US equity futures were generally over 2% higher and the Nikkei was up 368 by midday.
In the realm of currencies, the removal of uncertainty and increased optimism was manifested in a huge rally in the carry trade, the JPY and CHF crosses. The reason for the positive correlation between the JPY crosses, equity markets, and the general perception of risk could be because the carry trade is based on credit. Therefore, as the availability of credit increases, risk perception decreases, equity markets rally, and the carry trade benefits. Elsewhere, the USD action was mixed as we saw the USD higher against the JPY but lower against the EUR and GBP.

'Seize the day' is the typical translation for carpe diem but another interpretation is 'eat, drink and be merry, for tomorrow we die.' If markets believe that today's action could leave the US government overstretched and we could see another round of USD selling that creates another crisis one in which there may not be a backstop. Optimistically, one might believe another important phrase 'Don't fight the Fed.' In this case, it is the government and we wouldn't fight it either

The yen rallied sharply across the board, advancing to 186.20 against the sterling, 150.59 versus the euro and 105.71 to the dollar. With global equity bourses posting sharp losses, traders scaled back carry trades as a result of the heightened risk aversion. Meanwhile, the greenback jumped to its highest level since October 2007 against the euro at 1.4213 and a fresh 2 ½-year high versus the pound at 1.7562.
The key highlight in the Friday session will be the US labor report for August, with consensus estimates calling for a loss of 75k jobs in non-farm payrolls versus a loss of 51k jobs from July. The unemployment rate is seen remaining unchanged at 5.7% while average earnings are also expected to hold steady at 0.3%.

Although US economic fundamentals continue to deteriorate it remains to be seen when a shift toward an easing stance by the FOMC will materialize given the current inflationary outlook.

Dallas Fed President Fisher expressed concerns over inflation, saying 'it is pretty clear that trend consumer price inflation has accelerated over the past few months'. Further, he added that 'while it seems pretty clear that economic momentum is slowing, the jury is out on whether lesser momentum will be sufficient to translate into the relief on the price front over the intermediate to longer term'. Fisher expects the economy will 'suffer anemic growth for the current and perhaps next couple of quarters'. We expect the Fed to leave rates unchanged over the remainder of the year, and foresee a shift toward interest rate cuts in Q1 2009.

The Euro (EUR) traded lower as EUR/JPY was sold hard in the Asian session then continued to track lower before US data allowed a recovery. German Industrial Production was considerable weaker than expected at -1.8% vs. forecasts of -0.5%. Overall the EUR/USD traded with a low of 1.4197 and a high of 1.4347 before closing the day at 1.4241 in the New York session.

The Japanese Yen (JPY) traded in huge ranges on Friday as Heavy carry unwinds in the Asian session were reversed as the GSE bailout plan from the US government was processed. In Q1 Business Capex fell -6.5% vs. 2.5% forecast and -4.9% previously. Overall the USDJPY traded with a low of 105.54 and a high of 107.35 before closing the day around 107.14 in the New York session.

The sharp rise in US unemployment in Aug produced volatile price action on the US dollar, ultimately leaving it little changed. While the headline payrolls reading was worse than expected (-84K), especially given downward revisions, there were rumors that the 6.1% jobless rate (forecast 5.7%) was an error. USD also recovered after its payrolls sell-off with help from a steady DJIA rally from its NY morning lows around -145pts to a 33pt gain at the close.

Oil prices were volatile, NYMEX crude whipping around $105.15-108.10/bbl, finishing in the low $106s. The New Zealand dollar licked its wounds after Thursday's slide, trading a 0.6618 - 0.6709 range.

AUD/USD hit its 0.8028 low very briefly amid the post-NFP whipsaw trade but mostly printed above 0.8100 and closed at 0.8159.
EUR/USD was subdued ahead of payrolls then ignited into a 125 pip range (high 1.4349), easing back to 1.4267 at the close.

USD/JPY slipped as low as 105.53 but generally traded higher as Wall St recovered and caught a late bid on the WSJ report that Treasury was close to finalizing its plan to support FNM and FRE.