World Market Update - North America

Credit Conditions Worsen, JPY Higher, Equities Higher

Wed, 19 Nov 2008 00:40:55 +0100

So I finally get it. I never did before. I finally understand what it's like to be that kid sitting in the back of the math class struggling. You know, there was always that one kid who did his homework, came to class, was relatively smart in every other subject but just couldn't wrap his mind around the laws of mathematics. I finally understand what those kids felt like all those years ago because as I now sit at my desk and try to make sense of today's market, I simply don't get it. Perhaps it is because the impenetrable truths of which we have been writing about and trading on are breaking down. The correlations and trading signals that we've previously employed to navigate our way through this tumultuous market since last August seem to no longer be holding. I say "seem to" because two days do not make a trend, but two days can be an eternity in today's market.

So what is happening? Equities are rallying broadly, across Asia and Europe and although North American equity futures are pointing to a softer opening, there is no question that we closed on an upbeat note on Thursday. At the same time, credit conditions are worsening. Uncertainty over the future path of not only the US Treasury's TARP bailout plan but the US Federal Reserve's extraordinary liquidity injection measures is causing the all-important measure of credit market health, the LIBOR/OIS credit spread, to once again widen. After narrowing for weeks as credit market conditions improved and funds began to flow, the spread is wider by 10-basis points this morning. In addition, the one-month USD deposit spread is widening as well; trading at more than 100-basis points again this morning. Finally, the JPY, the world's proxy for currency and financial market risk is once again strengthening. That fact, taken against the widening of credit spreads is not surprising but against a backdrop of a nearly 3% equity rally in Asia and 2.5% in Europe, a Yen rally looks positively puzzling given their near perfect inverse correlation in recent months between the price action of the JPY and stocks.

Further, the US dollar has been under pressure, ceding a full big figure off of the USD Index in the past 24 hours, though the rally in commodities has been relatively muted, especially given that the CRB is up only 2 points this morning as oil struggles to find a footing at $58. Could it be that we are seeing a return to normal market conditions and that the unshakable correlations with respect to risk aversion and acceptance of the recent past will no longer hold in the coming period? Are we entering a new phase of market turmoil with either a new set of trading rules or are we simply entering a period where we'll all have to think for ourselves instead of simply following along blindly wherever these few market indicators take us? As a market participant, you learn to love patterns. You try to make sense of and find order in randomness. Therefore, a possible change in patterns presents a whole new set of risks, opportunities and challenges in terms of managing your business.

G20 World Financial Crisis Summit

The world's leaders are making their way to Washington this morning, congregating to debate future action and possibly even regulation in response to the world’s financial markets crisis. The G20 will have a powerful mandate for action in that the leaders seated around the negotiation table represent 85% of the world’s economic production and two thirds of its population. There is an unquestioned desire to work cooperatively on a solution to the coming economic slowdown but whether or not a real consensus can be achieved is yet to be determined.

British Prime Minister Gordon Brown, who has been at the forefront of the governmental response to the credit crisis with his plan to recapitalize his nations' banks (a plan that was essentially copied for all but a few key points around the world), is calling for more coordinated action to spur economic growth. Other delegates would rather focus on how best to incorporate emerging market economies into established world financial institutions such as the International Monetary Fund so as to best enhance exchange rate stability. Still others seem focused on banking regulation and the credit market contagion that has sparked the crisis.

The one sure point to make this morning is that there is a great deal of positive economic sentiment riding on the notion that this summit will produce a meaningfully positive result for the global economy. Failing a consensus on one of the above-mentioned issues, much of that positive sentiment could quickly dissipate.

North America Economic Data

US retail sales for the month of October have failed to find a floor for consumer spending as figures released this morning came in much worse than analysts' consensus market forecasts. The headline figure printed at –2.8% vs. forecasts calling for –2.1% against a prior month’s reading of –1.3%, which was revised slightly lower from –1.2%. Sales excluding autos were soft as well, though it is clear that motor vehicle sales are acting as a significant drag on consumer spending as s whole. Import prices, excluding oil, came in as expected in the US while export prices, excluding agricultural products, declined 0.3% more than expected to –1.2% in October. The market still awaits September business inventories and the preliminary reading of the University of Michigan's Consumer Sentiment Index for November, with analysts calling for a slight downturn to 57.0 from 57.6.

The economic news north of the border however has been decidedly more upbeat this morning, further underscoring the gravity defying health of the Canadian economy. New vehicle sales rebounded 2.5% in September after three successive months of declines while annualized sales jumped 2.2%. Manufacturing sales orders also edged 0.1% higher on the month on the heels of an outsized decline of 3.7% in August. The market's consensus forecast had been for a decline of 1.5% so today's report has delivered a rather surprising view of the health of Canada's manufacturing outlook.

The Canadian dollar is now consolidating the nearly 2.5 cents of gains it has achieved in the past 24 hours, with today's data perhaps affording the Loonie some additional resolve in the face of still softening oil prices. There is no question that yesterday’s $3 surge in crude oil helped fuel the CAD's rise, though it is showing surprising resilience amid a softer tone to commodity markets this morning. In addition, the extreme levels of volatility that have persisted in recent sessions seem to be abating somewhat, perhaps finally delivering a quiet North American session for USDCAD.

By Mark Frey, VP Foreign Exchange Trading

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US Treasury Changes Direction of Bailout - Nov 13th

Wed, 19 Nov 2008 00:22:47 +0100

TARP Will Not Purchase Toxic Assets

The US Treasury's Troubled Asset Repurchase Plan will not go ahead with its original plan to directly purchase toxic mortgage assets from US financial institutions. Instead, the bailout fund will likely concentrate on continuing to inject capital directly into troubled institutions via the creation of a special class of preferred stock by each firm. News that the TARP was again shifting gears was received with a mixed reaction. Many taxpayer watchdog groups heralded the move as a shift away from bailing out the big banks while openly embracing any idea that takes greater protective measures for taxpayer dollars. Market participants, however, interpreted the change as a reason to sell bank stocks as uncertainty grows as to how many institutions are going to address the impairments that have been taken to their balance sheets.

Yesterday's uncertainty over the future path of the US bailout plan and today's soft economic data have contributed to another equity route in Asia, though the news isn't quite so bleak from Europe. The Hang Seng and Nikkei 225 both traded more than 5% lower on the day while the FTSEurofirst 300 index of top European shares was down 1% with early resilience waning as mounting concerns of a prolonged global recession prompted investors to dump both financial and commodity stocks.

Traders have largely responded to the equity sell-off in a predictable fashion, dumping commodity-linked currencies while snapping up US dollars. That being said, the AUD, NZD and CAD have all held up relatively well compared to similar sessions in recent weeks. They have been at least partially supported by the Reserve Bank of Australia's reported intervention into the market with large purchases of AUD at 0.6350. Should the RBA not step in again overnight, and there is certainly no guarantee that they will, we could very well be looking at another round of lows for the dollar bloc currencies.

Recession is the Word of the Day

Contributing to the fears of a prolonged economic downturn was news that Germany has officially entered into a recession: two successive quarters of negative GDP performance with a third quarter decline of 0.5% vs. an expected contraction of 0.2%. China, with its newly minted $586B USD economic stimulus package also reported softer-than-expected annualized economic growth for Q3 at 8.2%, the lowest level of growth since 2001. The Organization for Economic Cooperation and Development (OECD) also released a report this morning forecasting that both Europe and the US will remain in a technical recession through Q3 of 2009.

As for the North American data, the US trade balance for September came in slightly better than analysts' consensus forecasts at -$56.5B vs. -$57B, against a previous reading of -$59.1B. Canada's merchandise trade surplus by contrast contracted $1.1B CAD in September to $4.5B in total, the lowest reading since January of this year. Energy and automotive products produced a drag on exports while both the volume and price of imports was higher on the month. Finally, as is the case every Thursday, US initial jobless claims were released this morning. Also, as seems to be the case every Thursday lately, first time filings for unemployment insurance benefits in the US exceeded expectations with last week's figure being revised higher as well.

Equity markets in North America are pointing to a firm opening this morning and the more robust tone in New York is limiting the dollar's gains on risk aversion. The CRB index of commodity prices is, however, trading 6.64 points lower near the open so there is risk of a decline in Toronto along with a firming USD.

Kuwait Halts Equity Trading, Announces Bailout

News came overnight that a court in Kuwait, the energy rich Gulf nation, will uphold a lower court's order to halt trading of its main exchange - an effort spearheaded by investors who have taken heavy losses with the bourse trading 31% lower on the year. Although a legal challenge has been launched opposing the closure, the commerce minister expects that trading will be halted until at least November 16th.

In response to the crisis, the Kuwaiti government has announced plans to allow its sovereign wealth fund to buy up distressed bank assets at a discount with a commitment to swap them back to the original owner in 5 years time, at the same strike price. The country's fourth largest bank, Gulf Bank, has been rescued by the central bank and it is feared that there will be more failures to come.

Other states in the region have resisted taking a similar approach, maintaining their commitment to free markets. "Bahrain depends on an open market approach so the stock exchange is available for investors to buy and sell shares without interference from relevant authorities," Sheikh Ahmed bin Mohammed al-Khalifa was quoted as saying in al-Watan newspaper. In addition, no bailout intervention is planned in the Gulf banking centre of Bahrain.

By Mark Frey, VP Foreign Exchange Trading

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USD Rallies On Anti-Risk Sentiment

Wed, 12 Nov 2008 19:09:15 +0100

Quiet Data Day But No Lack Of Incentives

The North American data calendar is bare on this day but there have been plenty of overnight developments on the global stage to provide currency traders with fresh incentives following yesterday's holiday on both sides of the border. The Japanese yen and US dollar continue to be well bid overnight as investors continue to migrate to safe haven stores of value amid the current turmoil.

The Bank of England released its inflation report this morning on the heels of its historic 150-basis point cut last week, somehow managing to surprise the market yet again with its dovish tone, driving the pound lower on the day. In addition to a downwardly revised outlook for economic growth, further rate cuts still appear to be in the cards for the BOE and the Pound is therefore likely to suffer in the medium-term, especially against the dollar given that the US Fed is running out of ammunition with which to combat the global slowdown via monetary accommodation.

The euro is also under pressure this morning following a Eurostat report showing that industrial production levels in the euro zone fell 1.6% from August to September following the previous month's 0.8% rise. Although analysts had been expecting a slightly more negative reading, the previous month's figure was also downwardly revised. On an annualized basis, industrial production in the European Union has declined twice as fast as expected with a fall of 2.4%.

US home values fell 9.7% on an annualized basis in the third quarter, the seventh consecutive quarterly decline, to a Zillow Home Value Index of $202,966, according to the third quarter Zillow Real Estate Market Reports, which encompass 163 metropolitan areas. Total price declines since the 2006 peak have come in at 12.8% nationally and 8.8% on the year while falling prices are forcing more sales at values which are less than the outstanding mortgage. In the past year, 30.2% of American homes sold have been unloaded at a loss compared to the original purchase price while 14.3% of current US homeowners are in a negative equity situation where the value of the outstanding mortgage is higher than the estimated value of the underlying property. As might be expected, poor news from the US housing market, the epicentre of the current financial turmoil, is further contributing to the risk averse tone of capital markets this morning.

The Canadian dollar has broken through the 1.21 handle late in the European trading session and now threatens to run higher in the short-term. After exercising the 1.20 figure from top to bottom repeatedly in yesterday's holiday trading conditions, the market was ripe for a break one way or the other. This morning's pro-dollar, anti-risk sentiment then was the determining factor in pushing USDCAD higher as traders continue to unwind their bets on commodity currencies with their increased sensitivity to global economic growth.

Swiss Franc Not Benefiting From Risk Aversion

LIBOR/OIS spreads continue to come in and the wheels of credit continue to turn more easily than we've seen recently. However, the continued exodus from equities, with the world's major bourses printing red results again for most of today, has seen the continuation of risk averse trading patterns in FX as well with the USD and JPY firming once again overnight, as has been the pattern of late.

Rather interestingly, the Swiss franc continues to not only sit on the sidelines of this global anti-risk, anti-carry market, but rather is being punished right alongside the very high yielding currencies that it was sold so heavily against just a short time ago. Although the JPY has rallied 9.8% and the dollar 11% since the failure of Lehman in mid-September, the swissy has traded with an offered tone, finding itself 5.5% lower over that same time. Given its traditional status as a safe haven for international capital and its low yield, one would expect the franc to at least hold its value in the present environment. In looking at a chart however, it is hard not to conclude that there is a further journey ahead for this one-way train.

Emerging Markets Continue To Show Signs Of Strain

Rumours of an imminent devaluation of the Russian ruble remain rampant in the broader market with news that the official trading band was widened by an additional 1% overnight. Russian equities have suffered a terrible fate from the systematic de-leveraging of the billionaire oligarchs and the currency has felt the pain as well. Other than Iceland, the affects of the easy money credit conditions of years past are perhaps nowhere more evident than in the natural resource rich state.

Indonesia has taken additional steps overnight to restrict the flow of capital from its borders, placing restrictions on both individuals and corporations wishing to sell more than $100K USD worth of the local rupiah. Efforts to maintain the value of the local unit are not uncommon in Indonesia but efforts aimed at restricting the flow of international trade are sure to draw the ire of trading partners during the current global economic downturn. It seems as though the overwhelming need to become inwardly focused in times of turmoil still trumps proven economic theory in the support of trade. Let's hope the rest of the world remains open for international business or the current situation will become a great deal worse.

By Mark Frey, VP Foreign Exchange Trading

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Risk Acceptance is the Theme of the Day - Nov 10th

Tue, 11 Nov 2008 19:41:14 +0100

Equity Rally Saps USD Strength

The USD came under pressure overnight as traders the world over legged into equities and higher yielding currency positions. Final details regarding the Chinese economic stimulus plan began to emerge overnight - after a few false starts in recent days - without dampening the positive buying effect on markets. A total spending commitment of $586B over the next two years was announced, aimed primarily at providing support to the domestic health care, housing, education and transportation infrastructure sectors.

Though the initial announcement occurred last week, the firm spending commitments announced today are emboldening traders to take on more risk in an environment where global growth concerns take a back seat, at least for a day. Equities have traded with a firm tone overnight with the Hang Seng rallying 3.52% in Hong Kong while the Nikkei 225 was bid 5.81% higher on the day. The buying vigour has carried over into both London and New York as equities remain well supported on the day with major exchanges around the world trading in black ink to start the week.

Shares of the insurance giant AIG are rallying this morning as well with news that the US Treasury will increase its funding of the financial behemoth to $150B USD under the Troubled Asset Repurchase Program (TARP), nearly double the original commitment announced in mid-September. Further complicating the political decision-making process in Washington is the fact that today's move with AIG comes against a backdrop of the big three US automakers still facing Congress, cap in hand, lobbying for financial assistance. The news is not all positive on the day, however, as Circuit City, the US electronics retailer, has filed for bankruptcy protection this morning. It's been hit by a perfect storm of competition, consumer spending downturn and credit worries.

Commodities and Currencies Firm

The overall risk accepting environment of the day is placing upward pressure on commodities and downward pressure on the Dollar. The kiwi unit briefly traded with a 0.60 handle this morning, driven higher partially by a surge in commodity prices but also a victory by the conservative National Party, ending 9 years of Labor rule. The Aussie Dollar threatened the 0.70 figure overnight, but is moderately ceding territory this morning as the USD retraces some of its losses.

The Canadian Loonie is on the defensive this morning despite the surge in commodities and risk appetite, though the market continues to whipsaw wildly in both directions. News that the Canadian housing sector continues to hold up well in the face of a global housing downturn has failed to inspire buying interest in the Loonie, which is as much trading on pure momentum as I've ever seen it. Market fundamentals continue to take a back seat to corporate flows and short-term momentum trading, producing wildly erratic price action on USDCAD. Liquidity also remains at a premium with tomorrow's holiday on both sides of the border ensuring the absence of many traders from their desks today, again serving to exaggerate the day's price moves.

By Mark Frey, VP Foreign Exchange Trading

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US Jobs Report Paints Gloomy Picture - Nov 7th

Tue, 11 Nov 2008 19:32:38 +0100

US Nonfarm Payrolls Decline by 240k

I've been chastised of late for being a touch too gloomy in this morning newsletter and for that I sincerely apologize. I promise that I'm not a depressed person; it's just that I have a great deal of difficulty wearing a smile all the way to the poorhouse. I suppose, in truth, I'm not actually headed to the poorhouse just yet as I've luckily divested myself of many of my equity holdings over the past 6 months, but my equities broker is definitely not getting a Christmas card this year. It's his fault that my portfolio is teetering on the brink of a 25% decline this annum and that's the story I'm sticking with.

I mention this to you all this morning because there is more bad news to share on the US employment front, though my broker is probably rubbing his hands together with sadistic glee as the value of my holdings continues to deteriorate (okay so maybe not but it makes me feel better if I vilify him). US nonfarm payrolls declined for the tenth straight month in October, shedding 240K jobs against expectations of a 200K decline. Adding salt to the wound was the fact that September's figure was also revised lower from -159K to -284K with August's figure being downgraded as well. Hourly earnings and the average workweek held steady while the unemployment rate ticked up 0.4% to 6.5%, the highest level in more than 14 years. The only bright spot of the report were public sector positions, which increased by 41K as public sector hiring is largely insensitive to the business cycle.

As might be expected, US stock index futures have significantly pared their gains though they will still likely open higher at the bell. The US Dollar on the other hand has retraced against most of the major currencies with the Dollar Index trading 0.22% lower after enjoying a positive tone throughout most of the overnight session. The market is still expecting to see pending home sales, wholesale inventories and consumer credit reports for September later on this morning. This will, of course, add further color to the outlook for the day.

Canadian Jobs Data Remains Firm

The one thing that my broker is probably disappointed with this morning is that the Canadian economy produced a net gain of 9,500 positions in the past month, against an expected decline of 10K, with an increase in full-time positions of 47,500 partially offset by losses in part-time roles of 38K. Although the unemployment rate actually ticked up to 6.2% on the month due to a surge of new entrants to the workforce, the report was on balance quite a positive assessment for the Canadian economy. Canadians are certainly not used to seeing an unemployment rate lower than that of the US given the more generous social safety net in Canada, which creates a higher rate of natural unemployment.

Further disappointing my dear broker is the fact that I'm overweight Canadian equities, something that I of course take full credit for and am, therefore, bound to outperform his other poor clients whom I'm sure were sitting on a comfortable nest egg of Lehman Bros. stock some months ago. Canadian equities, however, are still set to suffer a poor fate this morning, with the price of oil threatening to break through $60 in early trade.

Despite the pressure on oil and other commodity prices, as the outlook for global demand growth continues to weaken, the Loonie has rallied nearly 2 cents from the overnight low, primarily on the strength of the local jobs report. Volatility in USDCAD continues to be extreme, with illiquid trading conditions contributing to yesterday's near 5-cent run-up for the Greenback.

Euro Bounces Off of Overnight Lows

The Euro has bounced off of its overnight lows and is trading back up towards 1.2800 this morning on the general softness in the Dollar as well as some positive local developments. European Central Bank Governing Council member Erkki Liikanen acknowledged that the Bank is likely to deliver further cuts in the months ahead, thereby softening the disappointment of yesterday's under-sized rate cut. The market's growing sense of optimism regarding further monetary accommodation from the ECB was also bolstered by ECB President Trichet, who didn't rule out the possibility in an interview given in Frankfurt today.

On the data front, Germany's trade balance printed a figure of 15B EUR for the month of September, beating analysts' expectation of 13.5B as well as the 10.6B that was recorded in August.

By Mark Frey, VP Foreign Exchange Trading

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USD Largely Steady After Obama Victory

Thu, 06 Nov 2008 00:17:20 +0100

Markets Continue to Stabilize, but Risks Remain
Despite the fact that the global economy appears to be headed for a major recession - a notion all but confirmed by yesterday's rather weak manufacturing indicators from both Europe and the US - capital markets are continuing to stabilize if not become more buoyant. The credit freeze continues to thaw with the LIBOR to OIS spread (a figure which essentially summarizes the extent of credit risk pricing and the health of debt markets) coming in dramatically overnight once again to only 197-basis points. Only another 25-points to go before we can truly call market conditions normal, given the circumstances.
Asian equities traded with a firm tone again overnight, with the Nikkei 225 in Tokyo and the Hang Seng in Hong Kong trading up 4.46% and 3.17%, respectively. This continues what can only be described as a significant equity bounce in the region. Traders in Europe, however, have not gone on the same sort of euphoric buying spree this morning. London's FTSE, Frankfurt's DAX and Paris' CAC are all trading with an offered tone as we head into the close. European optimism was tempered this morning with a confirmation that UK industrial production is declining (-0.2% m/m and -0.1% y/y), retails sales within the Euroland remain sluggish and manufacturing activity, by way of EU and UK purchasing managers indexes, plumb new depths.

President Elect Obama has won a decisive victory in the US and the Democrats have strengthened their hold on Congress, thereby providing at least some political certainty to markets. However, North American equity futures are still pointing to a lower open - by approximately 1 percent - on news that private sector employment declined by 157K jobs in the US for the month of October by way of this morning's ADP Employment Report. In addition, although the CRB Index of commodity prices is trading higher this morning, both oil and copper are coming off their highs with some authority as traders re-evaluate the prospects for global demand growth in the coming period, thereby limiting the gains of the Dollar Bloc commodity currencies.

The BOE and ECB Set For Thursday - Currencies
The US Dollar Index has remained well bid overnight, supported in large part by weakness in the Pound Sterling and Euro as market participants tweak their expectations for tomorrow's widely anticipated interest rate announcements from the two central banks. In light of today's data, a series of major European financial houses have adjusted their expectations for the Bank of England to provide a full percent of monetary accommodation tomorrow. Expectations of the European Central Bank remain split between a 50, 75 or 100-basis point reduction.
That being said, we've seen a similar story play out positively for the local currency in Australia and New Zealand when their respective central banks delivered an outsized interest rate cut in an effort to get ahead of the coming economic slowdown. With such recent events in mind, it's hard to believe that either the Pound or Euro would be unduly punished by a larger than expected cut.
The Canadian, Australian and New Zealand Dollars have largely tracked equity markets and traders' views with respect to risk overnight. After rallying moderately amid the risk accepting, equity buying spree in Asia, London trading delivered a moderate retracement to the Dollar Bloc currencies before staging another upswing at the North American open. Meanwhile the Yen, which has traded inversely to the commodity currencies throughout much of the past few months, has firmed more than one big figure after hovering just under 100.00 vs. the Dollar throughout the Asian session. With commodities and equities on the defensive at the open, the North American session could see the secondary currencies retrace some of the day's hard fought gains.

By Mark Frey, VP Foreign Exchange Trading
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USD Sell Off Continues Unabated

Tue, 04 Nov 2008 22:01:53 +0100

Equities And Currencies Rally

The US Dollar Index is trading 1.7% off of its overnight high as it struggles to find a footing ahead of the US Presidential election. Traders at this point are not so much concerned with who will win, but whether or not the victorious candidate will garner a clear mandate from the US electorate. With current polls showing Senator Barrack Obama to have a 5 to 7 point edge heading into election day, with leads in many key swing states, those looking for a decisive victory and clear direction for the world's largest economy may not have to wait long. There is an implicit belief in equity markets that this could be a significant psychological turning point for the financial crisis, though very little if anything is going to change from a policy or regulatory front for many months to come.

Whatever the stimulus, traders were in a buying mood throughout Europe and Asia. The MSCI world equity index rose 1.2 percent while Europe's FTSEurofirst 300 index gained 2 percent on the strength of energy and financial firms. Asian stocks rose 0.3 on balance with Tokyo racking up hefty gains of 6.27% as the local market played catch-up after the holiday Monday, buoyed by resurgent exporters who have picked up big gains in the face of the Yen's 3-big figure sell off from last Friday's high.

The question that every trader seems to be mulling silently is how long is this equity bounce going to last? Although we have perhaps already seen the worst of the credit crisis (fingers crossed that emerging nations don’t begin to default on their sovereign debt), the world, by all accounts, is spiralling towards a dramatic global recession. Is it not too optimistic to think that it will all be roses from here?

As might be expected give the mood of risk acceptance today however, global currencies are rallying broadly against both the USD and JPY as investors once again take on more risk and begin to unwind their overweight holdings in US Treasuries. Market sentiment continues to become more upbeat, a notion that is underscored by the interest rate reductions now being delivered from the world's leading industrialized nations. So long as the equity rally continues and LIBOR rates continue to come down as they have again today, you can safely expect the US Dollar to come under pressure.

RBA Cuts 75, Who's Next?

The Reserve Bank of Australia surprised markets with a 75-basis point interest rate reduction last night, citing "significant weakness" in the global economy. In bringing their benchmark rate down to 5.25%, the lowest level since March 2005, the RBA has now provided two full percent of monetary accommodation since initiating its easing cycle in August. Counter intuitively, traders have reacted by buying the Aussie unit with the mindset that the RBA's rather aggressive policy stance will support the local economy in the long run, thereby providing a solid base for the currency.

Much had been made of the RBA's return to employing "two speed" monetary policy as many central banks had done in the past, where rather than tweaking interest rates by 25-basis points per meeting, as has been the current practice for the past number of years, an initial jolt higher or lower is followed by a series of smaller 25-point moves. With a cut in October of one percent and now ¾ of a percent, I don't think anyone expected the speeds to be overdrive and supersonic. The Aussie experience tells us that there is a great deal to be said for having "bullets left in the gun" so to speak. The RBA has plenty of room to be aggressive with monetary accommodation at this point because rates are coming off of relatively lofty levels as well as the fact that they didn't cut too much too soon. North American central banks have no such luxuries at their disposal. Interest rates, relatively speaking, were already at relatively low levels before the eye of the current financial storm hit and the decision to be aggressive in the early days of the crisis now means that both the US Fed and Bank of Canada have very little wiggle room on interest rates.

The Europeans and Brits however are not facing the same set of restrictions as their North American counterparts and we can therefore expect some fireworks when both the European Central Bank and Bank of England announce their latest decisions on interest rates on Thursday of this week. The market currently expects both banks to go lower by at least 50-basis points, though speculation is building that we will see larger cuts still. And, make no mistake, the market's anticipation of this aggressive line on accommodation and its affect on equity yields is what's driving the bounce in stock markets as opposed to an optimism that things are looking up in the global economy.

What's Hank Going To Do With All That Dough?

Every equity traders' favourite bailout proponent, US Treasury Secretary Hank Paulson has got some decisions to make. He's spent approximately $250B of the $700B super bailout fund and though the remainder of the taxpayers' funding was originally earmarked to purchase troubled mortgage assets from US financial institutions via a reverse auction process, there is a growing sense that we could see a second round of direct recapitalization of non-bank financial firms. Bond insurers, consumer finance entities and insurance companies are now coming into focus as potential beneficiaries of the program whereby the US Treasury takes a preferred equity stake in the companies as a direct means of providing capital to repair impaired balance sheets.

While the direct recapitalization route has been proven to have rather immediate positive affects, it also offers a great deal more comfort to taxpayers in that they have a much better idea of what value they're actually receiving for their money when compared to the reverse auction process of purchasing mortgage-backed securities. As such, there is some speculation now that the US Treasury will abandon their auction process altogether and simply purchase outright, securities from those firms that require further assistance. In any event, the incoming Administration will have plenty of options available to it come January.

Mark Frey, VP Foreign Exchange Trading

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Credit Conditions Continue to Improve

Tue, 04 Nov 2008 00:08:25 +0100

LIBOR Rates Continue to Come Down

London Inter-bank Offered Rates (LIBOR), the rates paid on USD in London's inter-bank lending market have come down again overnight, signalling that credit market conditions continue to improve. Although equities in Asia and Europe have been largely mixed, the currency market has been decidedly pro-risk, with all of the majors gaining ground on the US Dollar, including the Japanese Yen with Tokyo closed for Culture Day on Monday.

After hitting a peak of very near 5.0% on the bid, one-month USD deposit rates have declined markedly over the last two weeks and are now trading under 3.0% on both the bid and offer with only a 27-basis point market spread. Although 27-basis points is still extremely wide in normal market conditions, it is significantly narrower than the 200+ points we were seeing just a few weeks ago. Canadian one-month deposit rates are settling in just over 3%, with a slightly narrower bid offer spread. Although the higher Canadian rates should translate into positive forward points, the bid offer spread in most cases is still ensuring that one-month points on the bid remain negative while the offer has turned positive. In addition, given the fact that the US Federal Reserve's target rate is 1.0% and the Bank of Canada's 2.25%, one would normally expect a much wider divide in short-term deposit rates but there is still a significant premium being placed on Dollars due to the risk averse investing climate we find ourselves in. The LIBOR to OIS spread narrowed as well overnight on the belief that the ECB will cut rates this week to enhance market liquidity (Overnight Index Swap futures track the overnight effective Federal Funds rate, a major benchmark of the U.S. short-term interest rate market). Although the LIBOR-OIS spread is now down to just 224 basis points, it was 87 basis points before the failure of Lehman Brothers. In short, even as debt markets appear to be returning to at least a semblance of normalcy, there is still a long way to go.

Consolidation in the Banking Sector

Commerzbank, the second largest bank in Germany and a significant player on the world stage has tapped the German bank bailout fund this morning to the tune of 8.2 billion Euro. In addition, the bank announced efforts aimed at raising an additional 15 billion EUR privately after posting a quarterly loss of 285 million. Rather than being punished by investors for admitting it needs help to repair its ailing balance sheet, Commerzbank is finding its shares higher on the day, along with the rest of the German banking sector as investors anticipate that the majority of the bad news has already been divulged.

Further consolidation in the financial space has seen this morning with the announced merger of Bank Itau and Unibanco in Brazil, creating the "southern hemisphere's largest bank."

Stateside, Illinois-based Midwest Banc Holdings Inc posted a $159.7 million third-quarter loss, and announced that it had received preliminary approval to take on $85.5 million of new capital in the form of preferred stock, to be issued to the U.S. Treasury.

USDCAD Probes to the Bottom

USDCAD is testing to the bottom-side again this morning, probing through 1.1900 in the inter-bank market as investors take on more risk and commodity prices rebound moderately amid general USD weakness. In short, the market is continuing to price out the panicked wave of USD buying that began as global investors flocked to US Treasury bonds in mid-September. Some relative calm in equity and debt markets, as discussed above, is also serving to reinforce the belief that the worst may be over for not only the Loonie but currency markets in general vs. the USD.

Implied interest rate futures are currently pricing in nearly equivalent probabilities of further rate cuts from the Bank of Canada and Federal Reserve so it appears that in the short-term, it will be broad macroeconomic forces that drive the pair as opposed to short-term interest rate divergences. Although we shouldn’t be too surprised to see the move higher in CAD retrace on any negative credit market developments, it may be time to re-adjust those market orders placed to sell USD at 1.3100.

Mark Frey, VP Foreign Exchange Trading

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USD Stages Another Rally, Equities Sell Off

Fri, 31 Oct 2008 16:25:44 +0100

Smaller Than Expected BoJ Cut Inspires Selling Presure

The Bank of Japan, in a split decision, voted to cut interest rates 0.20% overnight, taking their benchmark target all the way down to 0.30%. Although there were four dissenters amongst the Board, three of them voted for a larger 0.25% cut and only one member voted to hold rates steady at 0.50%. As such, last night's move will allow the BoJ to go once more at an interval of 0.20% without actually taking nominal interest rates to zero.

Financial markets were disappointed by the slightly smaller than expected cut, and although we could certainly argue whether or not the extra 5-basis points will matter in the grand scheme of things, it does represent the effective maintenance of 10% of the BoJ’s benchmark. It's still 10% more than what participants were calling for.

Disappointment amongst traders, as we all know in today's environment, translates into risk aversion, and today is no exception. Equities immediately sold off in Tokyo on the announcement with the Nikkei 225 closing down more than 5% while the Hang Seng in Hong Kong shed 2.52% in value. The selling pressure has largely flowed into the European bourses of Paris and London, albeit on a modest scale compared to what we've seen of late, while Frankfurt is still trading in positive territory as we head towards the close. Although North American equity futures traded well into the red ahead of the open, they are experiencing a slight bounce in early trade.

Commodities are taking it on the chin this morning with the CRB index of hard asset prices trading 7.80 points lower to 263.62 as most classes of raw materials see broad declines. Gold, natural gas and live cattle prices are still being printed in black ink this morning however, as opposed to red.

US Treasuries and the Big Dollar are well bid this morning with the Greenback making gains across the board, rallying more than 2% against both the Australian and Canadian Dollars, with the Euro, Pound and Kiwi all trading more than 1% off of Thursday's closing levels. LIBOR rates continue to come in however, currently trading at 3.03%, providing a glimmer of hope to financial markets participants that credit markets are continuing to thaw even as traders largely shun risky equity assets.

Inflation in the US and Europe Heads In Opposite Directions

Euro Zone flash inflation for October printed a 3.2% figure this morning, down 0.4% from annual levels recorded just one month ago for September providing an encouraging piece of economic news for those dovish members of the European Central Bank who would prefer to be taking a more aggressive path on monetary accommodation through this crisis. Big Ben Bernanke however will not be impressed with the fact that the US Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) core deflator, advanced by 0.2% (0.176%) in September, a faster pace than the 0.1% expectation, contributing to a year-over-year change of 2.4%. That being said, the Fed has clearly indicated that economic stability, full employment growth and the risks to it, are the dominant mandate in the eyes of the Federal Open Market Committee and as a result, only the most alarming spike in prices would likely alter the current rate cutting path being traversed.

Canada's gross domestic product (GDP) fell 0.3% in August as July's big contributors to GDP growth - the wholesale trade, manufacturing and energy sectors - all retreated, Statistics Canada reported Friday. Although the decline beat analysts' estimates by 0.1%, it largely reverses the gains achieved in August, thereby threatening the third quarters' collective result. Meanwhile, US consumer income and spending having taken a turn for the worst that will all but guarantee the continuation of Q3’s soft US GDP performance into Q4. In any event, the bounce being seen in equities in early trade this morning may find itself to be very short-lived given the soft overall tone of this morning's data, thereby also contributing to the strength in the USD.

Tyson Wright, Senior Position FX Trader, Custom House

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US Federal Reserve Delivers The Goods

Fri, 31 Oct 2008 16:08:20 +0100

Market Rally Builds Momentum Despite Poor Q3 GDP Report

Well it's finally official, the US economy is indeed contracting according to the Commerce Department. The economy shrank at an annual rate of 0.3% in the 3rd quarter, the steepest contraction since Q3 2001. The downturn in economic activity was led by a 3.1% drop in consumer spending. This is the first contraction in consumer spending since 1991 and the severest decline since 1980. US Consumer spending accounts for 70% of US GDP and 14% of global GDP, so it is the most important component of economic growth. Spending on durable goods items like vehicles and furniture was especially soft, falling 14.1%. With consumers cutting back purchases, businesses cut investments by 1.0% as inventories of unsold goods remain high at $38.5 billion.

Although the GDP report confirms that the economy is in recession, the data was not as bad as analysts were expecting and US stock markets are poised to open higher this morning. S&P 500 futures are trading up 32 points (about 3.4%) as traders and investors are relieved that the data is finally out and are betting that the stock market has been oversold in expecting the worst for the US economy. Certainly the Federal Reserve's 50 basis point interest rate cut yesterday is also adding lustre to the attractiveness of stocks. It was odd that the US markets had such a subdued reaction yesterday when the Fed announced the rate cut. The S&P actually closed down 10 points yesterday as the markets pretty much ignored the Fed's offering. Well, it looks like stocks will be making up lost ground today, and with the markets having been hammered in panic selling over the past few weeks, we could see a really good rally over the coming weeks.

Stock markets overseas certainly appreciated the Fed's interest rate cut yesterday. Similar cuts over the past 24 hours by central banks in China, Hong Kong, Taiwan and Norway have restored investor confidence. Overnight, the Japanese Nikkei index jumped 817 points to close above 9,000. Japanese stocks have rebounded an amazing 28% since Tuesday's low. Emerging market shares have also roared back gaining 22% from four-year lows on Tuesday. An initiative by the Federal Reserve to provide dollar liquidity to Brazil, Mexico, South Korea and Singapore has helped stabilize emerging market stock exchanges and currencies. The sense is that emerging market economies remain in relatively good shape and could outperform European and North American economies for the next few quarters or even years.

Currency Market Correction Continues

Renewed investor confidence is providing support to commodity prices. Copper is holding above $2 and oil is holding on to gains north of $67. With the slide in commodity prices having been arrested, the Canadian dollar has rebounded sharply to more reasonable levels. The dollar has traded as high as 83 cents this morning, posting an incredible six-cent rally in three days. It would not be surprising to see the Canadian dollar back into an 85 to 90-cent range in the coming weeks.

Other currencies also continue to rebound nicely, particularly the Australian dollar, which is now back above 68 cents after having plunged as low as 60 cents on Monday. And the emerging market currencies have really settled down and have now recovered most of their recent losses. The Mexican peso is back well below 13 pesos to the dollar and the Brazilian real is up 17% in the past week. It certainly looks like we've seen the worst of the panic in the currency markets and there is room for these currencies to recover further ground against the US dollar in the days ahead.

The British pound and euro have also bounced back nicely against the dollar but not to the same extent as other currencies. The UK and European economies are expected to under perform in the coming months and the BoE and ECB are expected to announce further interest rate cuts next week. Just like in the US, parts of Europe (UK, Ireland, Spain) experienced massive housing market bubbles and consumers are dealing with huge debt loads. Many European banks are overexposed to risky assets and expectations are that Europe will have to go through a period of economic housecleaning just like the US.

Paul Lennox, Corporate Treasurer, Custom House

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Global Markets Rally In Anticipation Of Fed Rate Cut

Wed, 29 Oct 2008 20:39:28 +0100

Global Stock Markets Rally On Easing Credit Conditions

The intense selling pressures that have dominated market action for the past month abated somewhat yesterday and overnight as we near the Federal Reserve's interest rate policy decision today. Expectations are that the Fed will lower its overnight lending rate by at least 25 basis points and perhaps 50 from the current 1.50% level.

Renewed preference for risky assets got started in North America yesterday as money market interest rates finally showed signs of normalizing. Spreads on commercial short-term credit paper narrowed considerably yesterday suggesting that credit markets are slowly starting to function again. 3-month dollar Libor crept lower to 3.42% overnight in London from yesterday's 3.46%.

With corporations getting access to short-term funding, US stocks rallied sharply taking the S&P 500 10% higher, its second biggest one-day gain ever. And stocks in Toronto also rebounded as the TSX recovered most of the previous day's losses and closed up 7.2% on the day. Stock markets around the world joined the rally as they opened in Asia and then Europe. The Japanese Nikkei rose 590 points (7.5%) and shares in Europe jumped 5.3%. Emerging market stocks also got in on the action as they were bid 6.6% higher.

After yesterday's dramatic surge, New York stocks look set to open flat this morning. Positive earnings reports by Kellogg and P&G and a rally in energy stocks may be offset by profit taking and flattening of positions leading up to the Fed interest rate announcement at 2:15 eastern time. With stocks still down 40 to 60% over the past year, value investors are stepping into positions, but uncertainty about the severity of the recession warrants maintaining healthy cash positions as well. And there is still the unknown about how much more selling the hedge funds and mutual funds are going to have to do to meet fund redemptions. At the end of this bear market for stocks there are going to be a lot fewer funds out there and a lot fewer "professional" money managers. On the first good market bounce we might see another round of fund induced selling as disgruntled investors take the opportunity to get out of losing funds and many fund managers wind down their money losing operations. Yesterday's rally was a relief to see, but chances are the equity markets are not out of the woods quite yet.

Commodities and Currencies Put Up A Stand

Commodities prices firmed overnight led by a $4 rally in the price of oil. West Texas crude is trading at $66 this morning after having been as low as $62 yesterday. Commodity traders took long positions in oil contracts in response to the global stock market rally. Gold has bounced $80 this week and copper has rebounded 20% from Friday’s $1.67 low.

The bounce in commodities has finally allowed the Canadian and Australian dollars to find support. The Australian dollar has rallied 10% since hitting a low of 60 cents on Monday; and the Canadian dollar is now back above 80 cents having rebounded from yesterday's low of 76.79 cents.

Most other currencies have also rebounded sharply over the past 24 hours. The British pound is now back above 1.61 and the euro has rebounded to 1.28. There is no question the US dollar surge has been way over-done in a massive panic induced selling of just about every currency other than the yen. It looks like we may have seen the worst of this currency panic and the US dollar should continue to correct lower as other currencies put in a solid rebound. The Aussie, New Zealand and Canadian dollars, in particular, should enjoy a good recovery.

Paul Lennox, CFA, Corporate Treasurer

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Dollar Continues to Soar in Risk Adverse World

Mon, 27 Oct 2008 21:42:38 +0100

Global Markets Clobbered Once Again
Fearing the worst in terms of how bad this global recession is going to be, risk aversion is once again the order of the day as everything other than the safest of government bonds continues to be dumped in the markets. Japanese stocks sunk to their lowest level in 26 years with the Nikkei down another 6% earlier today. Shares in Europe fell another 5% to a 5 1/2 year low after the German IFO institute reported that German business confidence was at its lowest level since reunification five years ago.

South Korea cut its overnight bank lending rate by 75 basis points to 4.25%, the biggest ever move by the Korean central bank. This helped the Korean stock market to recover from the day's lows but it is still down 20% this month. Stock trading was halted in Thailand today after shares fell 10%.

And the bad news in terms of corporate earnings continued to roll in. Canon cut it forecast earnings for the rest of this year and next. And in Germany, Daimler announced that it is closing a primary parts plant and a major assembly plant for four weeks at Christmas because of falling consumer demand. Daimler stock fell 12% today, adding to the 66% decline in the company's market value before this announcement.

Commodity Rout Continues
Oil continues to ignore OPEC's announcement last week that it is curtailing production by 5%. Crude traded below $62 this morning. Although it is at its marginal cost of production in the $60 to $65 range, market momentum could certainly cause oil to overshoot to the downside, just like we saw it overextend to the upside last year. No one should be surprised if oil gets as low as $50 or even less in this environment. Remember, it was priced at less than $20 in 2001. With demand falling the way it is, oil will have to fall low enough that marginal production facilities become uneconomical and get shut down. Only once we start seeing that will the supply glut start to disappear and allow oil prices to stabilize. High cost drilling projects are already being shelved. If prices fall much further we may see tar sands operations cut back because the costs of production are now very high.

Mining companies have been closing high cost operations and putting new mine developments on hold. Projects that made sense when copper was between $3 and $3.40 a pound are no longer economical with copper now at $1.67. The boom times for the resource sectors in Australia and Canada and many of the developing countries (Russia, Brazil, Mexico, Chile, Indonesia) are over and these markets are being hit particularly hard. The Australian dollar is trading just above 60 cents this morning; it has fallen an incredible 39% since mid-July. And the slide continues for the Canadian dollar, which is now trading below 78 cents and is down 20% in the past month.

Euro and Pound Fall Further
The commodity currencies are certainly not alone in terms of being relentlessly beaten up in this market. The British pound is down another four cents today to its lowest rate in five years. The pound has now lost 23% of its value since mid-July and the euro has given up another cent. It is trading just above 1.24 and it too is now 23% lower since peaking at 1.60 in July. Who knows where the bottom is for these currencies? There is no doubt the euro was overextended at 1.60 and now, with this momentum, there is a good chance it will overshoot to the downside. The euro has averaged about 1.20 since it was introduced in 1988. With expectations growing that the ECB will cut interest rates further, there is a good chance we’ll see the euro below this long-term average at some point.

Paul Lennox, Corporate Treasurer, Custom House

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Economic Confidence Fast Eroding

Thu, 23 Oct 2008 22:55:02 +0100

Market Highlights Financial Market Damage Extending to Real Economy Overnight Developments Financial Market Damage Extending to Real Economy

The carnage continued to pile up in the financial markets overnight as capital is pulled out of any and all risky assets back into the safety of US Treasury Bills. You name it - stocks, commodities, currencies, emerging market and corporate debt - anything not considered 100% safe is being abandoned as fast as traders and fund managers can hit the "sell" button. The financial crisis that started with the pricking of the US housing market bubble continues to destroy financial wealth and is now hitting the real economy in the US and elsewhere as consumers and businesses retrench. More than $4.5 trillion dollars has been lost as US housing prices collapsed. More than $8 trillion dollars has evaporated in US stock market wealth. I don't know what the figure is for losses in the rest of the world but given some markets are down more than 60% the total global damage will be at least double the destruction of wealth in the US. So worldwide, the loss of financial wealth is in the neighborhood of $25 to $30 trillion.

The impact of this financial crisis and destruction of wealth is going to be felt on the productive economy for years to come. Now we can really understand why people who lived through the depression of the 1930's were so risk adverse with their investments and so fearful of being in debt even decades after the economic crisis had past. You don't soon forget what it feels like to lose half your net worth, and perhaps your home and maybe your job too. I was just in Los Angeles for five days and people there are genuinely scared. People understand that the world as we've known it for the past 30 years has changed and it is going to get worse yet before it gets better. What people are afraid of is how bad are things really going to get and how long is the economic recession going to last?

How many people are going to lose their jobs as the economic contraction snowballs? Thousands of people in the housing, banking and finance sectors have been laid off. The auto manufacturers in Canada and the US have cut jobs and now the Japanese carmakers are letting workers go. The retail sector is hanging tough with the Christmas season coming up, but there will be significant job cuts in that sector in the New Year. How deep will the recession go? Most economists suggest we are facing the worst economic downturn since the 1930's. But they are also saying it should only last maybe a year to 18 months and we should start seeing signs of economic recovery late next year. And that is what people have little confidence in right now. With unprecedented financial wealth destruction and the enormous debt loads consumers are carrying, it is going to be a very long time before we return to the freewheeling borrowing and spending that drove the economy the past 30 years. Just like after the 1930's, people are going to learn to fear debt and financial market risk. And that is going to make for a much different economic dynamic going forward than what we've seen the past 30 years.

Overnight Developments

As far as overnight developments go it's the same scenario as the past few weeks. Global stock markets plummeted overnight, as did most currencies against the US dollar. North American equities have opened modestly higher today, recovering some of yesterday's losses. Gold has fallen to a 13-month low of $720. Oil, at $66, is at its lowest level since June 2007. The world's central bankers continue to do what they can to cushion the real economy from the financial crisis. The Reserve Bank of New Zealand slashed its overnight lending rate a full 1% last night and the Swedish Riksbank followed suit with a 50-basis point rate cut of its own. Both banks said that they are prepared to cut interest rates further if necessary.

Paul Lennox, Corporate Treasurer, Custom House

Unprecedented Dollar Rally Continues

Wed, 22 Oct 2008 19:06:48 +0100

USD legs up

The US Dollar rally is full steam ahead once again this morning, gaining strength on virtually every currency barring the Yen. With amazing speed and volatility, the market is continuing to a) adjust expectations of world growth as the other central banks cut interest rates narrowing the yield between the States, and b) flee to quality, or perceived "safe assets" held in the United states- most notably in the form of Treasury bonds or bills. Risk is shunned, bringing an exodus of long positions in equities, emerging markets, and every currency it would seem except the JPY as noted. The dollar index is over 85, a level not seen since Q4 2006 as the US dollar was still falling.

Equities in Asia fell between 5- 7%, European shares were down ~3%, and NA futures are pointing to a negative open.

In a continuation of yesterday's moves, the GBP and EUR are free-falling as the EUR is now well under 1.30 and the GBP has lost another 2% on the day (after falling over 2.5% yesterday). Emerging market currencies such as BRL and RUB are getting hammered as one would expect on such a day.

The correlation between bond, equity, commodity and FX markets is very tight as the world grapples with the situation at hand. As one would expect, oil is trading lower, under 69$/bbl this morning, on growth concerns and flight to the US Dollar. This is very positive for the US economy as the price of oil has fallen while the value of the dollar against energy supplier currencies has gained, compounding the effects for US citizens. We will see if this filters down to the consumers at the pump. (Certainly isn't happening here in Victoria, Canada as gas has come off only 20% vs. a 53% decline in crude).

This unprecedented dollar strength is amazing to watch unfold, for better or for worse. The market is so volatile that decisions need to be made to protect your business. What impact will an adverse swing of 10% have on profitability or solubility? Although decisions in retrospect may seem to be wrong depending on market swings, many protect against the worst case (which chance of happening has greatly increased on either side).

Canadian Dollar slides further

The Canadian dollar has broken so many technical levels the last few weeks, and we are touching a level that many (including me) would have thought unreachable in 2008. We are now trading around 80c vs. the big dollar as oil falls and the Canadian economy weakens. It is true that the economy is probably in better shape than those of the UK and Europe, Australia and NZ. But with oil's decline and a slowing US the loonie has fallen out of favour.

Yesterday's quarter point cut did nothing to stop the move because the Bank downsized their growth forecast and signaled further cuts. The illiquid market makes swings more possible as big sell CAD deals push the market with greater fortitude than before. We do believe that the CAD is oversold, but the question remains when will it correct back?

Dollar Soars on Global Economic Worry

Tue, 21 Oct 2008 21:57:28 +0100

Bernanke speaks to congress

Federal Reserve Chairman Ben Bernanke spoke to Congress yesterday and, as expected, everyone was watching the outcome of the testimony. Bernanke noted that downside risks will remain prevalent for several quarters at least, and thus another fiscal package would be “appropriate” given the bearish outlook of the economy. This continues to show the severity of the financial crisis and the continuing efforts by central bankers and governments alike to stimulate the sector. It’s all about confidence and the only way the lending market will regain any trust seems to be with full fledged backing. As noted LIBOR and TED came down at the end of last week and the beginning of this one; however, risks remain and the governments know they have to continue to push until banks are freely lending to each other.

Secretary Hank Paulson also spoke and cautioned banks of the systemic risks associated with the hoarding of capital. The capital program application deadline is November 14 and it looks like banks will be considered on a first come-first serve basis. It’s hard to believe that a bank’s overall importance to confidence and profitability potential won’t be looked at to some degree…

Elsewhere overnight - Japan and France offered capital programs to their banks and the International Monetary Fund said it would help financial markets in various places. The IMF was poised to help Pakistan and Ukraine to shore up their balance sheets. There has been $3.3trillion of funds promised globally so far and more to come as the problems filter around the world. Although things have improved this week we are certainly not out of the woods yet.

Dollar stronger in overnight trading

The US Dollar is moving up once again on Tuesday and it appears to be the same old story. Although there are many economic and financial problems in the states, they have been priced in for some time and the world is playing catch up. The US seems to be ahead of the curve and when they sneeze the world catches a cold. This is certainly the sentiment again this week.

All majors are down this morning, excluding the flight-to-safety Yen. The commodity currencies look especially exposed with the loonie falling further ahead and after the BoC decision and the AUD down 3.0% from yesterday’s close. The Pound and Euro are struggling as growth concerns weigh; both currencies are breaching technical resistance levels. There could be more Dollar strength on the horizon as the world battles the concerns and interest rates converge to US rates over time.

BoC cuts interest rates by quarter point

The Bank of Canada held their interest rate decision today and as expected cut the benchmark rate. Many who were looking for a more substantial policy move of 50bpts were disappointed. The current target rate now stands at 2.25%. The bank judged that the current global financial woes will continue and the BoC signaled that more easing will “likely be required to achieve the 2 percent inflation target over the medium term”. Canada is in the rare circumstance where inflation is not a large concern like other economies. This affords a certain degree of luxury to the bank, being able to look at growth problems in isolation. Look for one more cut in 2009 and another in Q1 2009.