A Forex View From Afar

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Forex Analysis

Eastern Europe Debt Cut Lower

Written by A Forex View From Afar on Thursday, February 26, 2009

Two Eastern European states saw their debt-rating cut lower, near the default risk in the last days. Ukraine and Latvia saw their debt rating downgraded by S&P, to CCC+ and BB+ respectively.

According to the default swaps contracts, the market sees a high probability (above 50%) that Ukraine will default over the next year, reaching a 92% chance that the country will default within the next five years. Currently, Ukraine's debt is the most expensive in the world to protect. Consistent with the default rates study over the last three decades, about 25% or one quarter of the bonds with the C rating default.

How it was said in almost every article regarding the fate of Eastern Europe, the biggest problem in the area is the high degree of debt denominated in foreign currencies. Having the local currencies plunged in double digits percentage, foreign debt is a huge problem. In particular, the Ukrainian grivna has fallen 50% against the dollar in the last few months, multiplying the country’s problems.

The S&P downgrade came even though the IMF said no Eastern European country is near the default level, or in talks with the monetary fund for another loan. However, if Ukraine will default in the next few months, problem will arise for all the Eastern Europe, since investors see a high correlation between the regional economies.

One should asses that, if a country will default on its own debt, it will close the last door that leads to recovery. In addition, the consequences of such an action would be felt for years in row, so practically, the real chance of a country to call for bankruptcy is very small.

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Do Not Trust The Fed Funds

Written by A Forex View From Afar on Thursday, February 26, 2009

Traders in the Fed Funds Futures see the overnight Fed rate reach 0.50% by November 2009, while by May 2010, currently the longest maturity, traders see the overnight rate reach 1%.

Currently, there are two possibilities running in the market. First would be that Mr. Bernanke does not want to repeat the mistakes made in the past, keeping the Fed Funds too low for too long and creating another bubble. Adding to this assumption is that fact that some investors are afraid that the ultra-low interest rates, together with the Fed expanding its balance sheets, will mean that the CPI read will go untamed as the economy recovers. However, at this point this is only an assumption, since the Fed is currently fighting deflation.

The second possibility that might explain why investors look at the Fed to raise interest rates over the next period is that, according to the latest forecasts, the economy is projected to pick up again in 2010, with a 2% growth rate. However, there are big questions as to how someone can really expect that to happen when every release is pointing to a deterioration of the current situation. Recently, the markets were trembling on rumors about the nationalization of banks. If you ask me, we have not even reached the middle of the crisis. By expanding this assumption, we could say that the Fed Funds Futures market has not fully priced in all the essential information, or expects a certain improvement in the current condition. We could say this is a typical contagion situation.

Speaking from a fundamental point of view, expecting the Fed to raise rates in the following period is a little too much. Mr. Bernanke is a follower of the inflation-targeting regime, even though we cannot speak of such a thing right now. However, monetary policy practice has shown that anchoring expectations is one of the most important tools a central bank has. As such, in his recent speeches, Mr. Bernanke assessed that the Fed Funds will remain low in the following period. If any sudden changes appear in the Fed’s monetary policy, the Chairman will certainly anchor expectations in his speeches and public appearances, since the financial markets do not like surprises. Nonetheless, the Fed Funds is set to remain low for a long period.

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The U.K. Recovery Plan

Written by A Forex View From Afar on Tuesday, February 24, 2009

The U.K. government is trying at all costs to kick-start the economy, which includes expanding the lending programs throughout the nationalized banks and obligating the others to start lending.

The government plans to swap 4 billion pounds worth of preferred Lloyds shared to non-voting shares, to help the bank dodge paying 480 million pounds in annual interest rates. Instead, this money would be used by the bank to lend to its customers.

According to the latest HPI report, for the month of January, the average price of a house in the U.K. is roughly 150,000 pounds. This means that, Lloyds could potentially help up to 3200 families buy new homes, something that would probably give a small push forward in the housing market.

In addition to these funds, the U.K. government plans to lend 14 billion pounds throughout Northern Rock, the first bank that failed from the credit crunch, now also nationalized. This is a big shift from one year ago, when the U.K. authorities pledged to reduce the lending programs of the bank. The allocated funds should theoretically be enough to influence the demand side in the housing market. In January, U.K. banks approved only 23.4K new mortgages, down from an average of over 100K mortgages approved one year earlier.

Another significant boost the banking system would get is an insurance scheme, meant to stop any losses stemming from toxic assets. Even though the numbers are not official yet, news sources speculate that Lloyds and RBS would unload together around 500 billion pounds in toxic assets. For this to happen, banks are expected to pay a 3% to 4% fee, increase their mortgage approvals and take the first amount of losses. If we follow the guidelines set by the U.S. authorities, the financial institutions would support the first 10% of toxic asset losses and the rest would be absorbed by the Treasury.

Even though these projects are in the initial phase, they have the strength to influence the pound’s overall behavior. Up to now, the U.K. currency has been very sensitive to any news regarding the financials, and an improvement (or deterioration) would definitely influence it.

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International Monetary Fund in Asia

Written by A Forex View From Afar on Monday, February 23, 2009

Learning from the mistakes made in the past, Asian countries have come to an agreement to set up a currency fund to defend the local currencies. Thirteen Asian countries, including Japan, China and South Korea will contribute to form a $120 billion rescue fund.

About ten year ago, south East Asia passed through a severe crisis as their local currency took steep plunges in a very short period. Back then, the IMF bailed out the economies of a number of countries by issuing loans worth of $100 billion and imposed some very strict conditions.

These days, the Asian countries want to avoid, at all costs, errors made in the past. This fund is meant to protect the currency of only some of the countries, but not all at the same time. However, it is very unlikely a speculative attack would be initiated against the Chinese Yuan, since China has the largest foreign reserve in the world, or against the Japanese Yen, which is one of the most traded currencies in the world.

Japan has expressed an interest to protect the Asian and other emerging currencies. A few weeks back, Japan had agreed with the IMF for a $100 billion loan, which would be used to protect the emerging economies on the brick of a crisis. Overall, this is not a big surprise that Japan would express such an interest, since a large bulk of its exports goes to the emerging economies. Japan exports to China, and the ASEAN countries, almost as much as it exports to the U.S. and the Euro-area put together.

The plan to create a common pool of foreign reserves is very good, and it might create an initiative to take another step forward, maybe towards a better inter-state cooperation. However, things go very slow between Asian countries, so it will be very interesting to observe how things will evolve. Until now, most of the Asian emerging currencies have endured some strong declines in the last period, as investors exit their investments.

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Housing Plan Unveiled

Written by A Forex View From Afar on Friday, February 20, 2009

Equity markets are still trading mixed, even though the U.S. administration unveiled the first plan that aims directly at the rising level of foreclosures.

Up to now, this is the first attempt to help homeowners since the housing market had topped, back in 2006. Some say that, if this plan would have come one year ago, the current situation might have looked much better than it does currently. Falling home prices, together with the rising number of foreclosures were among the key factors that stayed at the base of the credit crunch.

Most likely, investors are luke warm towards the new housing plan because some key points remain unanswered. The biggest question is how exactly these additional funds will reach homeowners outside Freddie and Fannie. The government hopes that the extra funding will determine lenders (the big banks in our case) modify the loan conditions to help homeowners.

However, more likely than not the banks have already made their analysis some time back, before this announcement was made public, and had already taken the decision on which mortgages to foreclose on, and on which to help refinance. The big question is, if some extra cash coming from the government will sway banks to refinance the home loans. It is suggested that, the actual sum per household will not be that big.

Another problem is how exactly the government will work its way in the security market. Many of these mortgages have been repackaged and sold to private investors. To some degree, the government would eventually have to compensate the bondholders too, on top of the originating banks.

Overall, most financial analysts have a good opinion about the housing plan, but its actual implementation is still a question. As additional details become available, or eventually some results, markets might start buying the news, and see some decent trends in the equity markets.

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Ahead Of The BoJ

Written by A Forex View From Afar on Wednesday, February 18, 2009

Tonight, the financial markets await the Bank of Japan to present its latest monetary policy decisions, or better said, the bank’s way of aiding the economy without using conventional monetary policy.

The BoJ’s overnight call rate is already at unusual low levels, 0.10%, something that leaves the central bank’s hands tied, unable to use monetary policy to stimulate the economy. As such, the central bank will try to kick-start the economy using less conventional methods, such as buying corporate debt and buying shares from the main Japanese banks.

Earlier, the bank said it would use up to $11.0 billion in order to buy publicly traded shares held by local banks, and another $33.0 billion to buy corporate bonds. The two decisions would theoretically strengthen the Japanese financial system, first by consolidating the bank’s balance sheets and increasing liquidity, and secondly it will bring down the spreads on corporate bonds.

The Japanese financial system is heading towards a demanding period, the end of the fiscal year, on March 31. Usually, around this time of year, the liquidity in the financial system dries up, something not beneficial for the economy. The lack of credit, and thus liquidity, stemmed from the credit crunch, together with the end of the fiscal year will put additional strains for the economy.

The fourth quarter GDP contracted 3.3%, the most since 1974 and a couple of times more than its U.S. or European counterparts. According to the BoJ forecasts, the economy is expected to contract in the following two years. Most analysts agree that, Q1 and Q2 might be even worse than the last quarter, something that would demand even more action from the BoJ.

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Eastern Europe

Written by A Forex View From Afar on Tuesday, February 17, 2009

The latest drag for the Euro-area appears to be the Eastern European economies, which had their financial system hit very hard by the credit crunch.

A rather large number of European banks have exposure to Eastern Europe, including Raiffeisen, Erste Group, Societe Generale, RBS and UniCredit SpA. As such, any problem that rises in the emerging European countries will create problems in the main-bank, or mother-bank.

Banks with subsidiaries to the Eastern European market have tried to cut back their exposure lately, reducing the available funds for the local branches. Therefore, the local central banks were the only ones able to provide the much-needed liquidity, but so far they appeared to be overwhelmed by the demand side. The IMF was just a call away, which had to bail out some countries with $50 billion.

The problems the economies face are huge deficits (much higher than the European Union’s target of 3% of GDP) and ratings downgrades from the major rating agencies. From one point of view, these deficits are a rather huge problem since the Eastern economies grew in the last years at a very strong pace, outperforming by far the Western economies, but still run quite large deficits. Economics 101 says that deficits must be run mostly during the slowdown periods, to help kick start the economy, not when the economy is booming, or you will risk overheating it.

The biggest problem with the Eastern European economies is that their debt is denominated in foreign currencies. Consumers have been lured by the ultra-low rates on foreign currencies, compared with the local ones. In Hungary, the official interest rate was 10%, Poland 7%, Ukraine 16% and Romania 11%.

Investors running from the country, creating a net outflow of cash, will ultimately depreciate the local currencies. The Hungarian Forint and the Polish Zloty tumbled at record speed in the past months, reaching the lowest value seen in the last few years. This adds pressure on consumers, making them choose between defaulting on their loans, which would put additional stress on the banking system, and cutting back their expenses, which would ultimately affect the economy.

However, up to now, these problems have not materialized despite the currency plunge. Still, the default rate has not risen dramatically in percentage terms, and retail sales have fallen, but in-line with the declines seen in the Euro-area. From where we stand right now, it still appears to be a liquidity problem in the Eastern European economies, rather than a solvency problem, as in the Western economies. Liquidity problems have been caused by foreign banks that reduced their funds for the local branches, and by investors withdrawing their portfolio investments. Even so, it should be noted that the line between liquidity and solvency problems is very thin.

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It's A GDP Story

Written by A Forex View From Afar on Tuesday, February 17, 2009

The last few weeks showed some very poor quarterly results from the developed economies. Among the leading countries, the Australian economy is the last one still pointing to a positive GDP, but some say the economy might contract as well.

Tonight, a report showed the Japanese economy contracted 3.3% in Q4 from one quarter ahead, the most since 1974. In comparison, the Japanese economy averaged a 0.5% quarterly growth rate over the last four years. The record slump came as exports, the countries main source of income, tumbled at a very fast speed in the latest months. Only in December, exports plunged a record 35% from one year earlier.

Very poor reports come from all over the world. The Confederation of British Industry said that it expects the U.K. economy to contract 3.3% in 2009, downgrading their earlier projection from -1.7%. The huge revision comes as the international conditions had become even tougher, and up to now, the actions taken by the BoE and the government seemed to have fail.

If these forecasts hold true, financial markets will probably experience new chapters of risk-aversion. However, this might be more visible in the currency market, especially in the euro and in the pound’s value, than in equity markets, which seem very resilient to move any lower. In the currency market, usually the yen is the currency that denotes risk-aversion, but after a strong series of comments from top Japanese officials about the yen’s strength, the currency appears to move only up. As thus, the euro and the pound might break very easy under the 1.27 and under the 1.40 support levels.

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Treasury's Money Supply

Written by A Forex View From Afar on Thursday, February 12, 2009

The latest reports show that the Fed is preparing to add four new primary dealers, as the Treasury is set to auction up to $2.5 billion this year, in order to raise cash for the much needed stimulus programs.

Primary dealers are the main bidders for U.S. debt, issued periodically by the U.S. Treasury. Currently, there are 16 primary dealers, including all the big names from the Wall Street, the lowest number on record, preparing to bid for what will probably be the biggest amount of treasuries ever sold. From the primary dealers, treasuries pass into the secondary markets and become marketable. In other words, primary dealers are the main market makers for U.S. debt.

By adding four new dealers, the Fed will try to reduce the spreads in the primary market, as some traders have complained lately that the market has become rather illiquid, with relatively small volumes. An illiquid market means the government would have to pay more at its auctions, and this is not too good when you are preparing to sell a record amount of debt.

The Treasury is preparing to borrow up to $2.5 billion of debt this year, almost four times more than the amount of debt issued in 2008. This means that for every basis point, the government will have to pay $250 million per year in interest, or $70,000 per day.

The huge amount of debt issued might be another reason the Fed wants to start buying longer-term debt. This way, it will reduce even further the yields on the Treasury bonds, helping the government pay less in annual interest, and at the same time sending the mortgage and commercial paper lower (in theory, that is).

All this debt come at a huge cost, and most likely, the dollar will be sacrificed. Having the Fed buy U.S. bonds, the printing press will once again start working day and night, increasing the money supply at a strong pace. From economics 101, when the supply surpasses the demand side, the price has to fall somewhat lower until a new equilibrium point is met.

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Emerging Markets Still Under Pressure

Written by A Forex View From Afar on Tuesday, February 10, 2009

Emerging markets continue to be under pressure, as global economic fundamentals weaken from one month to the next. The latest forecast shows a rather hard year ahead for more and more economies.

In the last few years, as global merchandising boomed and the banks found enough cash for almost every loan request, the emerging markets thrived. Their economies were in a so-called “catch up process”, in which the country usually run huge deficits (both public and private) as living standards improved. Moreover, these deficits were usually denominated in a foreign currency, as was the case with Hungary and Iceland.

Now, the emerging economies are paying the price for their large macroeconomic imbalances. The majority of emerging currencies plunged at a strong pace in the last year, as risk-aversion made foreign investors pull out their money. On average, most emerging currencies plunged around 30-50% in the past year, and these declines have continued in 2009.

Since the emerging markets built their economic growth on foreign debt, the recent plunge in the local currency value raises even more problems, as the country struggles to pay its periodic installments. This was the case of Iceland, Hungary and now Russia, all of which have been punished by the financial markets.

The outlook is very austere too for the emerging economies. Russia’s economy is forecast to contract by 1% in 2009, the South Korean economy a little over 2%, while the Hungarian economy is expected to decrease by 3.5% in 2009. As such, the IMF’s struggle to raise more cash for 2009, to be able to help the bleeding economies is welcomed these days. Most likely, a number of emerging economies will default in 2009. The rumors during the last few days, is that Russian banks are looking to restructure their debt and these rumors seem to have merit.

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Interest rates Vs. Yields

Written by A Forex View From Afar on Monday, February 09, 2009

Even though the Fed has pledged to maintain the key interest rate at very low levels for an extended period, the yield on the longer loan instruments rose at a strong pace in the last month.

In the financial markets, governments and corporations use bonds to issue new debt and finance their activity. The yields on these bonds represent how much the entity would have to pay for its loan, so a lower interest rate is in its advantage. In order to conduct the monetary policy, the Fed influences only short-term rates, up to a year. However, the Fed has no direct control over the longer-term yields, but it tries to influence them through a whip effect.

Moreover, these longer-term bonds, such as the 10 and the 30-year, have risen quite spectacularly lately. From the beginning of the year, the yield on the 10-year bond rose by 30%, from 2.40 to 2.90 points, while the yield on the 30-year bond rose 35%, from 2.81 points to 3.68 points

As the yields on the U.S. government debt rises, it raises the marginal cost of holding cash reserves, and thus it undoes the Fed’s rate cuts. In addition, these higher yields are sent all over the market, raising the cost of mortgages, personal loans and adds a crucial weight to the U.S. debt, especially now, when the 2009 budget deficit forecasts are measured in $ trillions.

Lately, there have been strong speculations that the Fed would be tempted to start buying treasuries in the primary and in the secondary markets with a maturity longer than a year, in an attempt to further expand its balance sheets. Nevertheless, this holds a major problem, because it will assure investors that they will be able to find a counterpart in the Fed, tempting sellers to sell at a higher price. In other words, the Fed is willing to assure the demand side, disrupting the supply-demand relationship.

If the Fed will really start buying long-term treasuries, its implications in the currency market would be adverse. Firstly, it would allow investors to run out of dollar denominated assets in other risky assets, searching for a higher yield, which would be dollar negative. During this time, the yield on treasuries will remain relatively flat, or it will head somewhat lower (which indicates risk aversion), but still the dollar would lose ground.

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BOE Policy

Written by A Forex View From Afar on Sunday, February 08, 2009

As the Bank of England is reaching the shores of conventional monetary policy, it now tries to use and implement new measures in order to pull the U.K. economy out of the recession.

Starting this week, the BoE might start buying commercial paper, in order to bring the borrowing yields down to levels that are in-line with normality. In normal market conditions, which we are currently not, central banks operate through buying and selling government issued debt. Now, the major central banks from across the world have expanded these rights.

From now on, the Bank of England would be a major player in the corporate debt market. The BoE plans to act both in the primary and in the secondary corporate bond market. This, in turn, will help the corporate environment by bringing the yields down on existing bonds (throughout the secondary market), and assure cheap liquidity in the primary market.

This decision will certainly aid the U.K business environment, helping some companies avoid debt rating downgrades and running out of cash. As such, the U.K. financial system might gain some more strength, which should theoretically help the U.K. pound. Until now, the sterling has been responsible for both positive and negative news streaming out of the U.K. financial system.

The pound’s outlook lies on the upside in the following period. The market (and thus the pound) might get a big push forward from the stimulus plan vote, which will help the markets buy risk, and sell the safety of the dollar. In the short run, the 1.48-1.49 level will be very important for the pound. In that area, the pair faces an important swing area and a trend-line that holds the pair from early November. If it breaks higher, the pound has a clear path towards 1.53-1.55 area.

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ECB Press Conference Analysis

Written by A Forex View From Afar on Thursday, February 05, 2009

• The Governing Council decided to leave the key ECB interest rates unchanged
• the latest economic data and survey information confirm that the euro area and its major trading partners are undergoing an extended period of significant economic downturn
• external and domestic inflationary pressures are diminishing
• we continue to expect inflation rates in the euro area to be in line with price stability over the policy-relevant medium-term horizon
• the Governing Council will continue to keep inflation expectations firmly anchored in accordance with its definition of price stability
• overall, the level of uncertainty remains exceptionally high
• economic activity throughout the world, including in the euro area, has weakened substantially
• Foreign demand for euro area exports has declined, and domestic factors, notably very low confidence and tight financing conditions, have adversely affected domestic demand. Taken together with other available economic data for the euro area, this points to very negative quarter-on-quarter real GDP growth in the last quarter of 2008.
• continue to see persistent weakness in economic activity in the euro area over the coming quarters
• the very substantial fall in commodity prices seen since the middle of 2008 should support real disposable income, and thus consumption
• the outlook for the economy remains surrounded by an exceptionally high degree of uncertainty
• risks to economic growth remain clearly on the downside
• annual HICP inflation continued to decline in January 2009, falling to 1.1%, according to Eurostat’s flash estimate, from 1.6% in December 2008
• lower commodity prices and the prospect of weak demand confirm our assessment of mid-January that inflationary pressures in the euro area are diminishing
• headline annual inflation rates are projected to decline further in the coming months, possibly reaching very low levels at mid-year
• inflation rates are expected to increase again in the second half of the year
• turning to the monetary analysis, the latest evidence confirms a continued deceleration in the underlying pace of monetary expansion in the euro area
• M3 and, in particular, the components of M3 that are most closely related to the ongoing financial tensions – such as holdings of money market funds – have shown high month-to-month volatility of late
• the intensification of financial tensions since September 2008 is leading to significant substitution among the components of M3.
• the flow of MFI loans to the private sector moderated in the course of 2008, largely on account of weakness in loans to households, especially for house purchase
• outstanding MFI loans to non-financial corporations contracted for the first time since the onset of the financial turmoil, confirming the significant weakening of corporate credit at the end of the year after a long period of dynamic growth
• the substantial reduction in key ECB interest rates since October 2008 appears to have been passed through to lower bank lending rates, thereby easing financing conditions for companies and households.
• there are some indications that the pace of tightening of bank credit standards is stabilising, albeit at high levels by historical standards
• the European Commission projects in its January 2009 interim forecast a substantial rise in the average euro area government budget deficit, to 4.0% of GDP this year, from 1.7% in 2008
• this rapid deterioration of the fiscal position is broad-based among euro area countries and is due to the economic downturn
• in 2009 seven euro area countries are currently expected by the Commission to exceed the 3% of GDP reference value for the budget deficit
• it is therefore essential that governments return to a credible commitment to medium-term budgetary objectives as soon as possible.


The ECB press conference continued in the same downbeat tone, as it did in the last meeting. The ECB forecasts are rather poor, saying that the economic downturn might continue over the coming quarter. The euro-area economy is affected by the same credit crunch as its main trading partners. However, Mr. Trichet put a lot empathy in the last few meetings (as in the one held today) that each central bank acts in its own universe, and each of these universes are different in its own way.

As such, the Governing Council had again re-stated its resilience for 0% interest rates, but dodged any question that would demand any other clarification on the 0% benchmark. Currently, there is a debate going on if the ECB is referring to the targeted rate or to the overnight rate, but Mr. Trichet avoided clarifying this issue.

Despite the ECB refuses to adopt a low interest rate, trying to avoid a liquidity trap, Mr. Trichet said the bank adopted a “non-standard quantitative easing” by accepting commercial papers, expanding its balance sheets and by allowing banks to pledge for unlimited funds through its open market operations. The President of the ECB also noted that inflation expectations are different on the two sides of the Atlantic, mainly because the ECB has a quantifiable target, of 2%.

What is more important, Mr. Trichet said is that the current 2% is not the downside limit, and he does not exclude cutting rates again in March. During the press conference the euro had a 60-pip range, but still was not able to break decisively anywhere.

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What To Expect From The BoE And ECB Tomorrow

Written by A Forex View From Afar on Wednesday, February 04, 2009

Tomorrow, the ECB and the BoE are expected to announce their monetary stance for the period ahead. The BoE is expected to reduce rates down to 1%, the lowest rate ever seen in the bank’s 3 century history, while the ECB is expected to hold rates at the current 2%.

However, most analysts agree that the ECB will resume cutting rates in March, at the next interest rate meeting. There is a lot of weight put on this particular meeting, because the ECB will update its staff projections. The euro area economy is forecasted to contract by up to 2.5% in 2009 by some analysts.

At the same time, the U.K. economy is projected to shrink by 2.7% in 2009, while the downturn will continue until the fourth quarter, the Niesr research institute said today. Despite this, the sentiment regarding the future path of U.K. monetary policy is starting to change little by little. According to the minutes of the latest BoE meeting, the Governing Council will not reduce the overnight interest rate any lower, if there is not an observable deterioration of the U.K. fundamentals. As such, the BoE says it acted preemptively until now.

It is very likely that the ECB will continue cutting below the present 2% rate, while the BoE will appear more reluctant to reduce the interest rate any lower. This should influence the Eur/Gbp parity in the medium to long term, dragging the pair lower, as the rate differential shrinks. However, a lot of emphasis will be put on Mr. Trichet’s press conference, which will probably spark a lot of intra-day volatility

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The Pound Party Comes To An End

Written by A Forex View From Afar on Tuesday, February 03, 2009

Even though the dollar posted some large gains last week against the majors, the pound was shielded from it, until today.

The pound rose nearly 850 pips last week, or a little more than 7%, in a time when the euro, aussie and the swissy plunged to multi-month lows, holding very closely to the current lows. The pound-buying spree came shortly after Barclays’ Chairman announced that the bank would post record revenues in 2008, despite that it refused any government aid.

Not only did the pound strengthen, but the entire U.K. financial sector was pulled higher. U.K. banks, led by Barclays, almost doubled their value in the last week.

However, the party came to an end today, when investors soon find out that things are not so rosy. Moody’s cut Barclays’ long-term debt rating two grades lower, down to Aa3. The rating agency said the bank might face another round of write-downs and losses stemming from the financial system, but the bank’s outlook remains stable, citing its strong core tier reserves. The news struck both the financial system and the pound, which tumbled almost 400 pips today before the U.S. open, during which time the European pairs barely moved.

The recent events show that the country’s financial stability has great impact over the local currency. As the credit crunch progresses, we might experience other strong declines/appreciation based on the financial system’s outlook. It should also be noted that, in the past, the euro reacted on negative news coming from the European financial system as well.

Regarding the pound’s outlook, it might now return to its close correlation with the euro and the rest of the majors. Later this week, the Bank of England is expected to cut interest rates 50 basis points, down to 1%, the lowest rate in the bank’s 3 centuries of history, something that might have a negative effect on the Sterling.

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Trade Desk View

Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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