17 září 2008

FX Market Update from John Hardy, Saxo Bank

Market Comments
Another breathtaking development for world financial markets overnight, as the US Fed nationalized AIG, taking a 79.9% stake in the insurance giant and extending it a loan of $85 billion. Previous to the announcement, the market was on tenterhooks, as it recognized that a failure in AIG involved far larger consequences and systemic risks than the Lehman bankruptcy. With the announcement (and actually previous to it as leaks developed that the US govt was negotiating some kind of deal) a very sharp relief rally developed that took, for example, USDJPY from below 104 all the way to above 106.50 overnight. See more on USDJPY in the charts section below.

The question now is how long any relief rally can last on the risk front - was this a one-day trade or do we see further relief in the days ahead? The key markets to watch will be the credit spreads that indicate liquidity and the instruments that tend to correlate with these spreads, such as government bond yields and equities. S&P500 at 1200 is a critical level. As long as the market tries to regard the glass as half-full, the USD could come under further pressure in the short term as we have seen the strong greenback as mostly allied with the fear trade.

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