A Chill Descends on Fannie, Freddie and the U.K.

by: Grace Cheng

In the absence of major economic releases Monday, major currency pairs took the opportunity to take a breather and traded in narrow price ranges after last week’s dramatic moves. The US dollar was slightly down against virtually all major currencies such as the Euro, Swiss franc, Japanese yen, British pound, Canadian dollar, Aussie and Kiwi, but as trading progressed into the US session, the dollar rebounded versus the Swiss franc.

GBP/USD bounced from a low of 1.8625 to an intraday high of 1.8725, mainly the result of technical short profit-taking moves after last Friday’s (near-term) bullish candlestick formation. The Pound will be playing defense this week as traders look forward to the Bank of England minutes Wednesday, retail sales Thursday and GDP Friday, for more signs of where the UK economy is heading. Rate cut fears have been hounding the pound especially last week after BOE governor Mervyn King signaled he won’t rule out interest rate cuts as soon as inflation peaks at around 5% - perhaps later this year.

And today, the British Chambers of Commerce warned that UK could be in a recession within the next six to nine months, and if a “serious and prolonged recession” is to be avoided, the BOE has to cut interest rates from the current 5% to 4.75% in the fourth quarter of this year, and to 4.5% by March 2009.

UK Rightmove said Monday that house prices fell almost 5% in August on an annual rate, and this decline was the steepest since Rightmove began its survey six years ago. The average asking price for homes had fallen by 2.3%, or 5,403 pounds since last month.

The “feeling of chill in the economic air”, in King’s own words, is very likely to continue to drag the Pound lower in the coming weeks, if not days, but its movements this week will be influenced largely by UK fundamentals.

In US stocks, Freddie Mac (FRE) and Fannie Mae (FNM) are the main talking points again today after laying low for a while. Both of their stocks plummeted after Barron’s said shareholders of these two mortgage lending giants would be wiped out should the US Treasury come to their rescue.

Although US Treasury Secretary Paulson has said before that these two companies won’t be needing a bailout, his words don’t really mean much to those who have seen how wrong his words can be. The difficulties they face in raising more capital could soon prompt the Treasury to give a “Get Out Of Jail” card to them, with many saying, possibly by end September.

Barron’s said that a rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders. To ordinary shareholders, that would mean little or zilch.

Short-sellers of Fannie and Freddie are back in play again after the SEC restrictions on naked short-selling of 19 stocks expired last week.

Economic Calendar For Tuesday:

Reserve Bank of Australia board minutes 0130 GMT

German ZEW 0900 GMT

US PPI, housing starts 1230 GMT

Fed’s Fisher speaks on US economy 1400 GMT

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