Prices in the FX market continue to experience a strong correction putting a cease to the recent trend of dollar strength. The EurUsd surged over 350pips to the mid range of 1.40, while the UsdJpy dropped 170pips to the high 88 price area. The GbpUsd rallied 260pips to the high 1.55 level, following the trend of dollar selling. Equity markets were positive in the US and Europe, with the Dow up 4.2% or 359pts and the SPX back above 900 on a 5% gain. Interest rates remain the cornerstone of the market with the squeeze in treasuries pushing yields to historical lows. The capital inflow is likely to slowdown inferring that the bubble in treasuries may burst if investors begin to regain confidence in riskier assets. Commodities were mixed with oil marginally lower at $44.22bbl, while gold advanced 2% to $854oz.

Despite deteriorating economic conditions in Eurozone, Traders drove the Euro substantially higher. German PMI fell to its lowest level on record at 33.5 vs. 34.6. Growth projections have been revised to the downside, particularly employment and GDP expectations. In the UK, the BoE minutes are set to be released tomorrow and it is likely to reflect a unanimous vote to cut rates 100bps last meeting. The stance by the central banks regarding monetary policy illustrates the extent by which they are willing go in an effort to salvage the global economy.

Price trends in the FX market acted as a strong indicator of risk appetite among Traders and today’s movements were fueled further by today’s rate decision. A break in correlation between equities, FX, and commodities at the latter end of the week, signaling the market was shaping up for a major correction. The Usd traded at its lowest levels in two months against the Euro, and the Fed decision to cut rates 75bps to 0.25% accelerated the frequency of selling. We may see a prolonged period of devaluation in the dollar, if investors reallocate funds out of Usd denominated assets. The Fed’s aggressive rate cut, invigorated the financial markets and provided investors with a level of reassurance that the central bank will go to great lengths to move towards a recovery.

ACM Forex
Advanced Currency Markets