G7 FX – Overnight




It was an extremely volatile day on
Friday as all eyes remained on equities.  The Dow opened down and
fell -670, but rallied very quickly back to flat, causing a huge reversal,
especially in EUR and AUD, spiking up to the days highs of 1.3618 and
0.6747.  Equities then proceeded to be sold off, which caused all rallies
to be sold into. 
EUR crashed down 4 big figures
throughout the day, giving bid to the USD, as crosses got hit.  It came to
a low of 1.3258.
AUD sold down to 0.6330 (dropping just
shy of 6%) and NZD followed lower.  GBP came to a high of 1.7178 as
EURGBP was sold off to a low of 0.7857, but as EUR reversed, GBP came
lower, back down to 1.6858. 
Lots of eyes were on USDCAD, which had
the biggest move of the day playing catch-up with other currencies,
trading up from 1.1600 to 1.2135.  Barriers were protected at 1.20 but CAD
roared through, trading up 2 big figures in less than 10 minutes, with a
quick sell-off coming back to 1.1725 levels.  Little attention was paid to
the data, despite Canadian net change in employment coming in way
above expectations. 
The one exception to the volatility was
JPY, which traded in a tight band between 98.50 and 99.25 despite the
early sell off in equities, only to run up to 100.68 on the late rally. 


Financial Developments Over the Weekend




The G7 statement came out on Friday
night and said “the current situation calls for urgent and exceptional
action” and that all tools available would be used to prevent large
financial intuitions from failure.  We interpret this as reflecting an
agreement among the G7 that (1) the Lehman bankruptcy has played a crucial
part in the renewed and sharp decline of financial markets in the past few
weeks and (2) every effort will be made to prevent a repeat of the Lehman
collapse.







The G20 statement also pledges to use
all tools to assure market stability.  It seems optimistic that EM can
continue to grow despite the fall in commodity prices and the economic and
financial problems faced by Europe and the US. The statement itself pretty
much reiterates the G7 statement and similarly has few specifics.







Euro-zone leaders held an emergency
meeting yesterday to discuss more specific European measures to support
the financial system. The official statement from the summit is a far more
detailed plan of action relative to that announced by the G7. Measures at
a national level will be announced on Monday by the largest economies, but
the statement provides a good indication of what these are likely to
involve. The most important steps discussed are offering direct capital
assistance to banks and a government guarantee (or other similar
arrangements) of new medium-term (up to 5 years) bank senior debt
issuance. This is very similar to the UK plan that was announced last
week.  The statement suggests that co-operation between European
policymakers is happening faster and to a greater degree than had been
priced into the FX market. We therefore expect some of the recent weakness
in the EUR to reverse and think GBP should appreciate for similar
reasons.







The Australian and NZ governments have
also announced a guarantee of bank deposits and wholesale lending for
Australian banks.  






Asian Currencies



·        
It was another volatile day in USD/EM
Asia on Friday, with a very biddish tone after US equities dropped more than 7%
overnight, but most Central Banks were rumoured to be in and
offering USD. In the afternoon, Washington news that the US is taking two
dramatic steps to repair ailing financial markets (guaranteeing billions of
dollars in bank debt and temporarily insuring all U.S. bank deposits) saw
equities recover and saw some selling interest in USD/EM Asia as players
squared positions.