US Dollar Up Despite Dismal Jobless Claims, Wholesale Sales – What Will Friday’s G7 Meeting Bring?

The US dollar ended the day on a stronger note as an end-of-day selloff in the US stock markets triggered yet another round of flight-to-safety. More specifically, the DJIA ended the day down 7.33 percent while the S&P 500 finished down 7.62 percent, while the CBOE’s VIX Volatility Index hit a fresh record high of 64.92. Furthermore, US economic data was far from optimistic, as the 4-week moving average of initial jobless claims (which helps to smooth out the volatility associated with the week-to-week figures) jumped to 482.5K from 474.25K, marking the highest reading since at least January 2002. Meanwhile, US wholesale inventories jumped 0.8 percent in August, as foreign and domestic demand wanes. Indeed, the ratio of inventory to sales hit 1.1, the highest since March as nearly every component showed building supply levels along with weaker sales. Overall, economic data points toward recession for the US, which could be confirmed by GDP figures for Q3 and Q4.

Will the US go the way of the UK by recapitalizing banks in exchange for shares? It looks like the idea may be gaining traction. According to Treasury Secretary Henry Paulson, the $700 billion rescue bill passed last week allows the government to do so in addition to buying troubled assets. This was the method used by Sweden back in the early 1990s when they faced their own financial crisis, in which shareholders were not compensated and only some banks were included in the plan, chosen with a microeconomic model that determined which were most likely to survive. While any sort of action by the Treasury is likely to take weeks, the announcement of such a plan could provide a boost for investor confidence. The next big question mark for the markets is this Friday’s G7 meeting in Washington. Treasury officials have said that no joint initiatives will be announced at the meeting following the coordinated rate cuts on Wednesday, but this could change depending on market conditions. Nevertheless, a lack of strong statement or plan is likely to take a toll on the markets when they open in Asia on Sunday, so the pressure is on for G7 officials to do or say something meaningful.

Euro Loses Ground Despite Hawkish Comments, Swiss Franc Struggles To Recover

The euro held up throughout the European trading session amidst hawkish commentary by European Central Bank Governing Council member Ewald Nowotny. Mr. Nowotny said that Wednesday’s rate cut to 3.75 percent will “ensure that inflation expectations remain anchored” and that it should “not be seen as a first step in a possible series.” This rhetoric helped to curb speculation that the ECB would be inclined to cut rates yet again at their next meeting, and as we mentioned yesterday, the ECB remains one of the most stubborn central banks when it comes to maintaining their focus on price stability. Nevertheless, the euro fell during the course of the New York trading session as the greenback recovered against most of the majors. The Swiss franc, on the other hand, remained fairly strong against the US dollar as the currency remains a “safe haven” during times of volatility, similar to the Japanese yen. Looking ahead to Friday, the euro faces limited event risk while the Swiss franc will see the release of labor market data. The Swiss unemployment rate is anticipated to hold steady at 2.4 percent for the month of September, suggesting that domestic demand will continue to hold up. However, there is potential for the unemployment rate to rise, as companies may not feel as inclined to hire workers as the global economic slowdown threatens to weigh on Swiss export growth. Nevertheless, Swiss fundamentals don’t tend to have a huge impact on the Swiss franc, leaving technical levels all the more important for trading pairs like USD/CHF.

British Pound Drops to Nearly 3-Year Low - Buying Opportunity?

The British pound held its own for much of the European trading session, but around 10:30 EDT, the currency plummeted against the US dollar when stock markets in the US started to turn negative. While the Japanese yen becomes the most attractive during times of market-wide risk aversion, the US dollar has taken second place which has worked against both the British pound and the euro quite a bit. Indeed, the UK’s bailout plan announcement has done little to soothe the fears of investors, and the latest economic data out of the UK hasn’t helped either. First, HBOS reported that the average cost of a home dropped 13.3 percent in September from a year earlier, marking the sharpest decline since records began in 1983. Meanwhile, the trade deficit widened to match a record in August of 8.2 billion pounds, as the global economic slowdown led export demand to falter. A closer look at the data shows that exports declined 4.5 percent, while falling domestic demand led imports to drop 3.4 percent. Overall, downside risks remain for the British pound from a fundamental perspective, though 1.70 - 1.71 has historically proven to serve as a solid support/resistance level for GBP/USD, suggesting we could see a bounce in the near-term.

Japanese Yen Bulls Stay In The Game As Investors Remain Jittery

The Japanese yen eased back in the morning amidst quiet trading, but subsequently surged amidst a burst of volatility that sent the DJIA and S&P 500 plummeting more than 7 percent. According to our latest forex correlations report, pairs like USD/JPY remain highly sensitive to the DJIA. The end of the SEC’s ban on short-selling of financial stocks may have had something to do with the move, but the predominant issue is a severe lack of confidence in the markets, and that is why the billions of dollars in liquidity injections by the world’s central banks haven’t really made a dent in deteriorating credit conditions. It is clear that investors remain very jittery, leaving traders unlikely to pile back into carry trades like the Japanese yen crosses. My long-term bias for the Japanese yen: bullish.

Australian Dollar, New Zealand Dollar Gains Prove To Be Short-Lived, Canadian Dollar Could Falter On Friday

The Australian dollar and New Zealand dollar rallied during Thursday morning as signs of stabilization in the financial markets spurred buying of carry trades. However, a jump in volatility late in the day sent the Aussie and Kiwi plummeting, much like the Canadian dollar had done throughout the day. Meanwhile, the Loonie faces event risk on Friday when the Canadian net employment change will be released. This figure is forecasted to rise by 10K and tends to have a huge impact on the Canadian dollar immediately after its 7:00 EDT release. However, Monday's release of Ivey PMI showed that the labor market conditions deteriorated as the employment component fell below 50. This has happened on two other occasions since December, both of which coincided with sharp declines in the net employment change. My fundamental bias for the Canadian dollar on Friday: bearish.

Terri Belkas is a Currency Strategist at FXCM.