G7 FX – Overnight




It was an extremely volatile day on
     Friday as all eyes remained on equities.  The Dow opened down and
     fell -670, but rallied very quickly back to flat, causing a huge reversal,
     especially in EUR and AUD, spiking up to the days highs of 1.3618 and
     0.6747.  Equities then proceeded to be sold off, which caused all rallies
     to be sold into. 
EUR crashed down 4 big figures
     throughout the day, giving bid to the USD, as crosses got hit.  It came to
     a low of 1.3258.
AUD sold down to 0.6330 (dropping just
     shy of 6%) and NZD followed lower.  GBP came to a high of 1.7178 as
     EURGBP was sold off to a low of 0.7857, but as EUR reversed, GBP came
     lower, back down to 1.6858. 
Lots of eyes were on USDCAD, which had
     the biggest move of the day playing catch-up with other currencies,
     trading up from 1.1600 to 1.2135.  Barriers were protected at 1.20 but CAD
     roared through, trading up 2 big figures in less than 10 minutes, with a
     quick sell-off coming back to 1.1725 levels.  Little attention was paid to
     the data, despite Canadian net change in employment coming in way
     above expectations. 
The one exception to the volatility was
     JPY, which traded in a tight band between 98.50 and 99.25 despite the
     early sell off in equities, only to run up to 100.68 on the late rally. 


Financial Developments Over the Weekend




The G7 statement came out on Friday
     night and said “the current situation calls for urgent and exceptional
     action” and that all tools available would be used to prevent large
     financial intuitions from failure.  We interpret this as reflecting an
     agreement among the G7 that (1) the Lehman bankruptcy has played a crucial
     part in the renewed and sharp decline of financial markets in the past few
     weeks and (2) every effort will be made to prevent a repeat of the Lehman
     collapse.







The G20 statement also pledges to use
     all tools to assure market stability.  It seems optimistic that EM can
     continue to grow despite the fall in commodity prices and the economic and
     financial problems faced by Europe and the US. The statement itself pretty
     much reiterates the G7 statement and similarly has few specifics.







Euro-zone leaders held an emergency
     meeting yesterday to discuss more specific European measures to support
     the financial system. The official statement from the summit is a far more
     detailed plan of action relative to that announced by the G7. Measures at
     a national level will be announced on Monday by the largest economies, but
     the statement provides a good indication of what these are likely to
     involve. The most important steps discussed are offering direct capital
     assistance to banks and a government guarantee (or other similar
     arrangements) of new medium-term (up to 5 years) bank senior debt
     issuance. This is very similar to the UK plan that was announced last
     week.  The statement suggests that co-operation between European
     policymakers is happening faster and to a greater degree than had been
     priced into the FX market. We therefore expect some of the recent weakness
     in the EUR to reverse and think GBP should appreciate for similar
     reasons.







The Australian and NZ governments have
     also announced a guarantee of bank deposits and wholesale lending for
     Australian banks.  






Asian Currencies



·        
It was another volatile day in USD/EM
Asia on Friday, with a very biddish tone after US equities dropped more than 7%
overnight, but most Central Banks were rumoured to be in and
offering USD. In the afternoon, Washington news that the US is taking two
dramatic steps to repair ailing financial markets (guaranteeing billions of
dollars in bank debt and temporarily insuring all U.S. bank deposits) saw
equities recover and saw some selling interest in USD/EM Asia as players
squared positions.