Currency Market: Where Are the Value Points?

The type of moves that we have seen in the currency market during the Asian and European trading sessions are typically what we see in a quarter or a half year. USD/JPY has fallen 5 percent, AUD/USD is down more than 8.5 percent while the NZD/USD is down 7 percent. The sell-off in the Japanese Yen crosses are even more severe with AUD/JPY down 13.5 percent and NZD/JPY down 12 percent. Here is a list of the biggest movers as of 9am ET:

Thursday, I warned against a premature top in the EUR/USD!

Although it may be very tempting to say that the dollar has hit a top, especially against the Euro, in order for this EUR/USD rally to be real and for investors to be convinced to stop selling higher yielding currencies, we need to see stabilization in the financial markets and a return of confidence.

The mentality in the currency and stock markets is sell now, ask questions later. The low yielding US dollar and Japanese Yen continue to be the biggest beneficiaries of risk aversion. The only thing that investors want right now are safe haven plays. The dollar’s strength will force emerging market countries to rush to prevent a flight of capital out of their currencies - more rate hikes could be likely. With deleveraging being the theme of the day, when confidence is lost, it will be difficult to recover.

Where are the Value Points for the Currency Market?

In the Wednesday edition of my Daily GFT Report and on CNBC and Bloomberg I talked about how the dollar could rise another 5%. At that time, the EUR/USD was trading at 1.2829 and the GBP/USD at 1.6236. The GBP/USD has already hit my 5 percent target and at one point this morning even became undervalued on a purchasing parity basis. Although the UK GDP report confirms that the country is headed for a recession and validates the weakness, I believe that we have seen a near term low in the currency pair.

The EUR/USD on the other hand has only dropped 2.5 percent. The EUR/USD does not become a value play until 1.15-1.20. As for USD/JPY, it has also reached my target of 95. Although I won’t be a buyer at these levels, I won’t be a seller either. There are no rewards for heros in this type of market.

Will the BoJ Intervene?

If you are wondering about Bank of Japan intervention, don’t expect it to happen. As an export dependent nation, a strong currency is not in Japan’s best interest. However unlike in the past where the BoJ has intervened when USD/JPY fell below 105 and 100, we may not see any action by the Japanese government this time around. Since the problems are inherent in the US and the Eurozone, intervening at this time may be counterproductive for the Japanese. The Japanese government needs to stand aside and allow the US and Eurozone governments to take their measures to spur growth and not strengthen the dollar for their own short term relief.

Risk of Limit Down Day in US Stocks

With S&P futures already trading at limit down Friday morning, there is a decent chance that circuit breakers may be hit in the first hour of trading. The moves in the Dow Jones Industrial Average these days is strikingly similar to the move in 1906 and 1907 (Here is a chart from Barclays). In the last phase of the sell off between Q2 of 1907 and Q4 of 1908, the Dow dropped 37% before it bottomed out. From the August 11500 levels in the Dow, a 37% move would take the index down to a new 6 year low of 7245.

Click to Enlarge

Barclays Capital

Comments

[Smarty_Pants:]

"The mentality in the currency and stock markets is sell now, ask questions later"

It's called "Panic".

2008 Oct 24 02:59 PM

[Stalingrad:]

The comparison between 1907-08 and 2007-08 is illuminating. However, the 1907-08 drop was a continuation from Jan 1906. From peak to bottom it was 23 months. Presently we are only 12 months from the peak of October 2007. Dare we call the bottom so soon? Hopefully 7245 will be the bottom whenever that happens. If the new US president screws up and fails to deliver a new New Deal and the leaders of East Asia are ineffective in helping themselves and the US, then a new Depression may just be possible. Right now China still grows at 9% pa according to latest quarter figure. But remember what the past chief trade negotiator Madam Wu Yi said, if China does not grow at least 8% p. a. the unemployment rank will balloon because of the demographics trend. So besides watching for US we better watch China too.

2008 Oct 25 12:02 AM

[NOWHEREMAN:]

Emerging market countries are more likely to sell Dollars than raise interest rates to stem their currency losses. Russia started this a few weeks ago, Brazil a few days ago and Taiwan refuses to buy more US debt. I expect that all of the Countries currently suffering from an erosion of their purchasing power will start selling Dollar holdings to prop up their currencies.

From what I have seen, the Gulf States hold $2.5 Trillion of US debt and China $1.8. With the demise of oil's pump into their Economies The ME is contemplating selling this Dollar holding to continue their Economic Expansion.

Meanwhile, The Yuan has risen around 20% in tandem with the Dollar, translating into a deterioration in exports. Buying more Dollars is not an option.

To put it Mildly, The Dollar is in Bubble Mode not only in Price but also in the unprecedented explosion in its monetary Base.

Meanwhile Foreign Debt Reserves look to be Dropping.

If the amount of new dollars shloshing around the world exceeds US GDP, which is likely since GDP will drop, how long can the Bubble be sustained before the bleeding restarts in earnest?

2008 Oct 25 02:00 PM

[surgcare:]

The Dollar is a "BUBBLE" ready to pop .

2008 Oct 25 03:08 PM

[Greg Pinelli:]

It should be pointed out immediately that "paultauts" comments miss the mark considerably..it is not a matter of buying more dollars..this will happen as carry trade bets are undone and various Asian currencies are repatriated in dollar form to meet dollar obligations. As for countries NOT raising interest rates..I'd check the latest news on that one..several have.
As for Ms. Lien..who truly must be the token Asian on everyones list....
Where are the bargain points she mentioned? Where's the ANALYSIS..instead of the typical butt covering she does?? Let me give you guidance since taking a pretty picture for Mom seems to be Ms. Lien's lone virtue..
The US $ (as reflected in the etf SHORT UDN) will probably increase another 5-10%..against the stronger lousy paper. When UDN hits $24...start accumulating..it will be at $45 to 50 in a year..Though the rel play is in gold.
So much for Ms. Lien..as phoney and wafer thin as her analysis.

2008 Oct 26 08:41 PM