Congress Shake The World

As US politicos spent the week getting their act together, various European governments were forced to intervene to shore up their troubled banking system and the US dollar saw its biggest ever weekly advance against the euro. It was a bad week for the European currency across the board, and the euro also saw its biggest weekly fall against the yen and it even lost ground to its troubled neighbor, the British pound.

The week opened in Europe with the EUR falling to 1.43 at the news that the Belgian, Dutch and Luxemburg governments were bailing out Fortis to the tune of €11.2B. There were further developments in this story later in the week when the Dutch government announced it was nationalizing the Dutch part of the bank. Then, when Congress shocked the world by rejecting the $700B bail-out plan, the euro rose to test 1.45. However, growing concerns about the European banking sector and Monday’s plummeting oil price ensured that the euro would fall below 1.44 once more before the day was out. The euro’s woes continued and it fell more against the dollar on Tuesday than it had done during any day since its launch.

Tuesday also saw more banking grief for the Europeans as the French and Belgians stepped in with a €6.2B lifeline to Dexia, the world’s biggest lender to local governments. The euro found support at 1.40 on Tuesday afternoon, and commenced to rise. Wednesday saw a ray of hope for the euro in the form of better than expected German Retail sales. However, it was short-lived and despite a very weak US manufacturing PMI, better than expected US ADP jobs numbers and a growing confidence that the US bail-out plan would be passed, saw the greenback pushing the euro down once more.

The US Senate’s vote to pass the bail-out plan brought implementation one step closer and saw EUR/USD finally break 1.40. It was downhill from there to the ECB’s interest rate announcement. The central bank held at 4.25% as widely expected, but Jean-Claude Trichet’s follow-up press conference opened the door for an ECB cut sometime fairly soon and the euro plummeted, testing 1.3750. Friday’s NonFarm payrolls came in at -159,000, the worse in more than 5 years and much worse than expected. However, the dollar gained ground against the euro on the release of this news because it was in fact better than some sectors of the market had feared, it would also serve to ratchet up pressure on Congress to pass the bail-out and finally it was mitigated by the unemployment rate holding steady at 6.1%. There were no surprises this time round when Congress reconsidered and voted 263-171 to pass the US rescue plan.

The euro gained a little to test 1.39 as there are real concerns that the plan will devalue the dollar. However, there is little happening in Europe to inspire confidence at the moment and EIUR/USD closed the week at 1.3770.

GBP opened the week falling against the greenback. The weekend had seen breaking news that the British government was going to nationalize troubled UK bank, Bradford and Bingley, a major player in providing mortgages to the buy-to-let sector. This led to concern that other U.K. financial institutions would also fail. As the week progressed, disappointing UK PMI numbers across the board and more bad news out of the UK property sector increased speculation that the Bank of England would have to cut interest rates at its October 9th meeting.

The economic calendar is on the light side this week. For the US we have FOMC meeting minutes on Tuesday so we’ll be able to read the discussion behind the Fed’s decision to hold on September 16th. Wednesday’s Pending Home Sales will give us the chance to see signs of a bottom in the housing market. On Friday we can keep tabs on the US Trade Balance.
On Wednesday, look out for German Industrial Production and on Thursday the ECB’s Monthly Bulletin gives the stats that the bank used when deciding to hold rates last week.

There’s more housing data out of the UK on Tuesday and Tuesday’s Manufacturing Production and Thursday’s Trade Balance will give us some more insight into the UK recession. The big news out of the UK this week will be the Bank of England’s Interest Rate Announcement, with a cut of 25 bps being widely expected. The Bank of Japan and the Reserve Bank of Australia will also be making their interest rate announcements. I can’t see the Bank of Japan generating much excitement but the AUD looks like a good buy if the RBA only cuts by 25bps.
The central bank speaker agenda is jam-packed and of particular note in these fraught times. Please check our economic calendar for details.

Last week clearly illustrated how vulnerable Europe is to the current credit freeze with Bradford & Bingley, Fortis, Dexia and Iceland’s Glitnir and Kaupthing banks all being rescued in some shape or form by national governments. Meanwhile the Irish government pledged to guarantee debts and deposits to the tune of €400B in six of its key financial institutions. As I write, plans to save German mortgage giant Hypo Real Estate have fallen through when the private consortium pulled out of the rescue deal after looking through the company’s books.

On Saturday the heads of the big four European economies met in France to discuss a coordinated approach. After the summit they pledged to continue to bail out their own banks and went on to call for a global summit but stopped short of any collective action to tackle the problem at a Europe-wide level. This outcome will surely have ramifications for the week ahead and we see EUR/USD coming in for more downside pressure.