Fed Cut May Come Before Oct 29

by Ashraf Laidi
Sep 25, 2008 14:01 | 12 Comments

Risk appetite is slammed across the board on a combination of poor US economic data and negative corporate news. On the jobs front, US jobless claims surged to 490K, pushing the 4-week moving average to a new 5-year average. Durable orders tumbled 4.5% in August vs expectations of a 1.9% decline. In addition, GE suspends its buy back program and lowers its Q3 earnings. This follows the starkest economic from President Bush about a painful recession and a clear change in tone by Fed Chairman Bernanke.

Bernankes economic testimony sounded off a clear focus on the downside economic risks away from the usual balanced focus on inflationary and downside risks. This further increases the odds of an inter-meeting 50 bps rate cut. The next FOMC meeting is 34 days away, which is far too long a period of time for the rapid deterioration in credit conditions such as rising LIBOR/TED rates, as well as negative corporate news such as this mornings announcement from bellwether GE.

We have long held since May that the Federal Reserve would pause during the summer and continue easing in Q3-Q4. Never has the central bank raised rates before a marked decrease in the unemployment rate. And in the previous easing cycle, the Fed paused for 10 months during 2002 following the 2001 rate cuts, before adding 75-bps of easing from November 2002 to June 2003. In fact, were considering revising our forecast for a 1.50% low in the fed funds rate in 2008 to a low of 1.00% in 2009. Much attention has been given to the dislocation in credit markets and eroding confidence among credit institutions, but relatively little on the repercussions for the broader economy. With the unemployment rate having already breached the 6.00% before the end of summer and industrial production showing rare back-to-back monthly declines, much acceleration in economic dynamics remains ahead of us in light of the recent jump in layoffs and seizure in credit.

More economic evidence is due this morning. At 10 am EST, new home sales could drop by 2.0% to as low as 505K in August following 515K in July. Yesterdays release of the August existing home sales showed a 2.3% decline

EURUSD Dragged Down by EURCHF and EURJPY

Despite the aforementioned US-centric news, Forex markets dragged down the euro by more than a full cent off its $1.4760 high on rumors of a failed European bank. Reduced risk appetite is damaging dragging euro against the low yielding franc and yen as these thrive on uncertainty. EURCHF drops from 1.5950s to 1.5906 while EURJPY drops to 155.20 from 155.75. Yesterdays disappointing IFO survey continues to weigh on the single currency. We expect EURUSD to gradually extend declines towards $1.46, followed by $1.4580. Key support stands at $1.45 for next week. Resistance has successfully held up at the $1.4960s, and will be imposed at the trend line resistance of $1.4730s.


Fed Cut May Come Before Oct 29 - Eursep24 (Chart 1)

Cables Upside capped at $1.86

Sterling is boosted by the dismal release of US news, but it is expected to be dragged anew by the lower yielding CHF, thus losing its high yielding against USD. Bank of Englands MPC member Andrew Sentance said today the UK economy could contract in H2 2008 but did not suggest a rate cut is the solution as his ultra dovish colleague Blanchflower consistently indicated throughout the year. We maintain that further Bo Erasing is inevitable despite the hawks holding to their anti-inflation views. Negative US data releases may not necessarily boost GBPUSD mainly due to the impact of falling risk appetite on the exchange rate. Thus, were more likely to see a decline in GBPUSD from positive US news than an increase in the rate from negative US news. We expect a retest of the $1.8450 today, before further declines reach to $1.8350 next week. .

Weakens on Asian Woes

USDJPYs ability to hold above the 105.80s in the midst of surging risk aversion is partly due to reports of a run on a bank in Hong Kong as well as the resurfacing tensions related to North Koreas nuclear program. Our bullish stance in USDJPY of the past 2 days is maintained through the week until wee see a third attempt to break above 106.30. Weak US data drags USDJPY below 105.80s, but support is seen emerging at 105.50. Expect more rumors of an intermeeting Fed cut, which could boost US stocks and USDJPY.

Bears Approach Kiwi Ahead of GDP Report

Less than 2 weeks after the Reserve Bank of New Zealand surprised with a 50-bp rate cut, Q2 GDP is due today, highlighting the reason for the central bank move. Q2 GDP is expected to drop by 0.4% q/q from -0.3% in Q1 and 0.6% y/y from 1.9%. Not only we expect further declines in NZDUSD, reaching 0.6780s from the current 0.6850 but we anticipate faster declines against CHF and AUD at 0.7330 and 0.8130 respectively.

Comments (Showing latest 10 of 12) View All Comments
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 28, 2008 16:57
ajp,

The eventual passing of the US Treasury/Congress rescue package will surely trigger an initial rally in US stocks and reaccelerate carry trades at the expense of the yen. But the million dollar question is FOR HOW LONG? later this week , we'll get the ADP private jobs data (Wed), followed by the big US JOBS REPORT on Friday, which is expected to show a drop of at least 100K. There's also the ISM on Wed. Can we imagine the market reaction to this reports? Ive said many times and Ill say it again: THE RESCUE PACKAGE IS NOT AN ANTITODE TO THE SLUMPING ECONOMY. It ONLY relieves banks of their debt burden over the LONG TERM. So, any resuling yen decline from the rescue announcement is likely to be a good buying opprtunity.
ajp03002
United States
Posted Anonymously
11 years ago
Sep 28, 2008 7:40
except*
ajp03002
United States
Posted Anonymously
11 years ago
Sep 28, 2008 7:13
Hey ashraf,

I expect this bailout (whenever its passed) to have an inflationary,optimistic reaction in the equity markets, however, i don't know, expect for JPY, how high yielding currencies will react to this news. I would be a dollar bear, however, will the "carry traders" that unwound the last two months will try to reestablish themselves with more yen carry trades?
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 27, 2008 10:34
ajp, Yes, the coordinated liquidity injections by the Fed, ECB, BoE and SNB were a considerable form of policy easing. But the target the price of money must be addressed by lowering the benchmark target for overnight funds, rather than continuing to target the quantity of money with liquidity injections. Announcing a decline in the fed funds and discount target triggers a swift psychological boost in buyers and sellers of the flow of funds.

3 months ago, people used the same argument you make; rates are too low and any more rate cuts spur further inflation. people's (and the Fed's) priorities were way off. Ive warned all along that as the credit market stress turns to turmoil and a standstill in banking confidence, the already weak economy will take a deeper hit, in which case, DOWNSIDE RISKS WILL OVERWHELM UPWARD PRICE PRESSURES and there goes away inflation. And this is exactly what's happening. inflation is DOWN and economic contraction is HERE. The Fed must make a shock slashing of interest rates, rather than over $1trillion in liquidty injections since summer 2007.

And by the way, did you kno that in 2003, Fed cut rates to 1.00%. Things were nowhere as bad as now and now rates are 2.00%.

Hope this clarifies it.
ajp03002
United States
Posted Anonymously
11 years ago
Sep 26, 2008 23:17
The reciprocal currency arrangements with the European Central Bank, and the central banks of Switzerland, England, Canada, Japan, Australia, Denmark and Sweden now totals $290 billion. Who needs more easing? I believe interest rates cuts are too big of a psychological weapon to be used currently. Only if the bailout plans fail or carry trades unwind to extreme levels, maybe then.

Other notes: Is AUD/JPY forming an ascending triangle pattern on an uptrend move?
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 26, 2008 19:11
Hi Ashraf,
Futures magazine can be found in most bookstores in the US, but not sure about Dublin. The shorter version of this can be found on this site in articles 2 weeks ago TITLE: "implications of gold rise relative to oil". There's more extensive analysis about this subject (gold vs oil) and the relationship between equities and commodities in my book in Chapters 6, 8 and 9. See Table of Contents in book section of this site.
Abid Ashraf
Dublin, Ireland
Posted Anonymously
11 years ago
Sep 26, 2008 18:50
Dear Ashraf,

Where can I access your Futures magaizne? Is this paid service?

Regards
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Sep 26, 2008 15:47
Patrik,

It depends what commodities we're talking about. as i argued often in this site and in this month's Futures magazine, gold will OUTPERFORM oil, as a result of prolonged central bank easing from US and other nations. Oil may remain weak but not fall off a cliff. Copper will be supported by improved demand and prolonged supply problems in Peru and Chile. As for food and agriculture, world demand will continue as the global slowdown varies around the globe. Eurozone, UK and Asia may slow, but the latter is surviving on intraregion trade. Commodities' overall rally has yet another 5-6 years according to historical cycles.
Patrik
New York, United States
Posted Anonymously
11 years ago
Sep 26, 2008 15:40
dear Ashraf, do you agree with the analysis that predicts that in the next few years the slowdown in worldwide economic activity will lower demand for raw materials, therefore decreasing prices of commodities that would subsequently lower the value of commodity currencies?
thanks

Nick E.
Posted Anonymously
11 years ago
Sep 26, 2008 9:58
Strong Website. Thank you for your contribution to the Industry...