The US Fed's Bernanke was out testifying before a House committee yesterday, with perhaps his most negative words on the economy thus far and endorsed the idea of more federal stimulus to shore up the economy. One House plan for stimulus would include extension of jobless benefits, road and bride infrastructure projects, and aid to local and state governments. The last stimulus package was about 1.3% of GDP. This time around, we suspect it would be twice that or more. I guess Congress will just tell the Treasury - "You can put it on the bill..." That bill is reaching scary proportions, but then again, so is the destruction of wealth in financial instruments and real assets. Going forward, one of the key calculations going forward will be the status of the capital destruction/fiscal stimulus balance and whether we get inflation or deflation.
US Treasury Secretary Paulson was also out yesterday detailing the bank recapitalization plan, saying that banks could sell preferred shares to the government worth up to 3% of their assets.
Despite the idea of a new stimulus plan, and despite risk willingness evident on the stock markets, the long end US treasuries rallied the strongest they have in at least two weeks. We've been trained to follow bonds more closely than stocks and yesterday was a real head-scratcher. In any case, JPY crosses were apparently following the developments in fixed income a bit more closely as well, as EURJPY sold off from above 138.00 back down to just below 135.00, as EUR was heavy and JPY ignored the rally in equity markets - also overnight in the Asian session.
We seem to be at a tipping point in the key USD/Europe majors. EURUSD is now back below that 200-week moving average that held it recently (comes in around 1.3375) but has not yet penetrated to new lows for the cycle, GBPUSD found support right at a key Fibo level down around 1.7100, and USDCHF closed above 1.1500 for the first time since late 2007. It seems that we're at a fulcrum point here - either the USD strength accelerates into new territory or it is pushed back and we carve out a longer term range. Considering the greenback's strength yesterday as equities rally, we prefer the stronger USD scenario - and from a trading perspective, it's rather easy to test this with reasonable risk/reward. If we do get the USD pulling stronger, the big targets come in the 1.2700 zone for EURUSD and the 1.1900 area for USDCHF. For GBP, we're wondering whether EURGBP breaks lower, and if it does, the downside for GBPUSD would be somewhat limited.
Risk spreads are sending mixed signals, with interbank lending pressures apparently falling rapidly, while worries in corporate default land have showed no signs of slowing.
On a broad basis, the CAD, which sold off so steeply lately, seems to have found some support here ahead of today's BOC meeting - in which it is widely expected that the bank will cut rates 50 bps to bring them to 2.00%. USDCAD in the 1.2000 areas is finding some resistance and EURCAD has slowed in the 1.6100-1.6300 zone that has held as resistance since early 2005. The short term view for CAD is uncertain - as long as liquidity pressures ease further and if equities and commodities continue to consolidate in the short term, we could see the CAD trying to fight back a bit (a simple 0.382 Fibo retracement of its latest monster leg up from 1.0300 to above 1.2000 would put it all the way back to 1.1425 without damaging the uptrend...), but longer term, the damage is done as the Canadian economy benefits most with its current structure from a resource hungry and booming global economy, not to mention a strong US economy. We don't see any of those factors any time soon, so a further rise to 1.2500-1.2750 would seem in the offing further out.
Chart: USDCHF
After a bout of range trading, USDCHF closed above 1.1500 for the first time since late 2007. Is it ready for further gains toward 1.1900+ where its 200-week moving average resides?
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