Overview

Having revised our U.S. Federal Reserve rate call in light of persistent negative developments and the anticipated repercussions still to come in that country, we must now turn to the implications for Canada.

Our revised forecast for the Bank of Canada is now that the overnight rate will fall to just 2.00% over the next three meetings. This means that we continue to call for 50bp cuts at each of the next two decision dates for the BoC (Apr 22 & Jun 10), and that we tack a further 50bp easing on at the opportunity after that (July 15).

Canada-U.S. Elasticity

At its simplest level, we believe Canada has perhaps a 40% elasticity to the U.S. For instance, if U.S. GDP were to be hit by a theoretical negative shock of 1%, Canada would slow by 0.4%, or thereabouts. The direct trade ties between the two countries are somewhat less than this (about 27% of Canada’s GDP is generated by exports to the U.S.), but the close link between credit markets provides an additional impact.

Given that our revised economic assessment of the U.S. now calls for an additional 125bp of Fed easing (for a floor of 0.75%, versus our previous call of 2.00%), that aforementioned 40% elasticity very roughly suggests that the BoC may wish to ease by an additional 50bp or so. In turn, this pushes our ultimate BoC forecast to a floor of 2.00% from our prior forecast of 2.50%.

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Reality Check

From a historical perspective, this will place the overnight rate at the same floor as it hit in 2001. This does not seem unreasonable, though given that this correction appears more serious than the 2001 one, perhaps there is a slight risk to the downside.

While tempting to forecast chunkier eases from the BoC given what the Fed will likely be up to, the BoC does tend to be somewhat more cautious and incrementalist than the Fed. Some portion of that incrementalist nature may have been shed with the introduction of a new Governor, but we feel that 50bp increments are still likely large enough for Canada.

Economic Angle

In Canada, the name of the game remains addressing the trifecta of the U.S. slowdown, the credit crunch, and the deflationary impact of CAD. That last impact could be waning if BoC musings are correct, but the credit crunch is intensifying, as is the U.S. slowdown. With core CPI still quite soft in Canada, there is ample room to ease.

Bond View

From a bond market perspective, our new view leaves us with a forecast for the Fed that is somewhat more aggressive than our forecast for Canada when contrasted against the market. Although we are more pessimistic than the market for both, the difference is more extreme in the U.S. Thus, this would seem to argue for the U.S. to outperform Canada in bonds, even though Canadian bonds have managed to keep pace and even occasionally outperform over recent weeks. This marks a reversal of our recent view. To be clear, once we enter the second half of 2008 or first half of 2009 we think there is very real scope for Canada to outperform the U.S. in bonds. But that time is not yet here.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

NY Fed’s Empire Index plunges to -22.2 in March from -11.72 in February, versus expectations of -7.0.

The 9.15 am release of the US industrial production figures expected at -0.1% from 0.1% will steer short-term interest in the pair, especially if a decline of more than 0.2% is in the works.

Q4 current account deficit drops to $173 billion from $177.4 billion in Q3 as the decline of the dollar boosted the trade part of the imbalance. Yet our concern going forward, is with falling US equities, which have proven an increasingly important component in financing the widening trade gap.

Sunday evening’s announcements from JP Morgan to purchase Bear Stearns for $2 per share (compared to Friday’s close of $30.85) and the Fed’s 25-bp cut in the discount rate to 3.25% had caused a brief rally in the US dollar, which was followed by continued erosion across the board. The Fed’s announcement to triple the maximum maturity of discount window loans to 90 days and its $30 billion in funding of Bear Stearns less liquid assets not only indicated the grave situation posed to the counter party risk involved, but also highlights the increased ineffectiveness of the Fed’s historic liquidity injections yet to date.

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Despite these historic liquidity injections and the Fed’s historic weekend decision to cut interest rates, our expectations lean towards a 100-bp cut in the Fed funds rate to 2.00%, brining the short-term rate well below the level of inflation. As the Fed has stated, these massive injections of liquidity are aimed at maintaining the market fed funds rate from falling below the 3.00% benchmark target. This will leave the Fed no choice but to come up with a shock rate by as much 100 bps in its benchmark target tomorrow so as to ease the cost of loans among commercial banks and keep it at those low levels.

Lack of Coordinated Cenbank Intervention Highlights Negative USD Fundamentals

Despite jawboning from Japanese government officials addressing the sharp rise in the yen, The only meaningful interventionist remarks serving to slow the strengthening yen were those by Japan’s LDP policy chief Tanigaki indicating the need for international cooperation. Indeed, currency traders are unlikely to temper the yen buying unless there are signs, or intentions of coordinate central bank intervention to support the dollar and cap the yen against the major currencies. Continued statements by officials pointing out the undesirability of excess currency moves will therefore prove of no effect, unless the central banks demonstrate some type of joint effort. Nonetheless, considering the rapid loss of the dollar’s interest rate differential and the ensuing deterioration in US economic fundamentals, central banks are unlikely to commit billions of reserves in intervention that would only to be eroded by counter speculative pressures due to the fundamentally-driven nature of the current moves in foreign exchange markets.

In the event that the Fed cuts by 100-bps tomorrow, the US-Eurozone interest rate differential will drop to 2.00%, the biggest US interest rate deficit since November 2002. The interest rate differential story is not the only theme haunting the US dollar onwards. Fears of continued prolonged financial market erosion and debt writedowns extending the macroeconomic weakness to business and consumers will lead to a prolonged recession and further punishing the dollar’s fundamentals.

Gold’s Prolonged Strength Despite Crises Sends Message

Unlike in the market meltdowns of May 2006, February/March 2007, July/August 2007 and November 2007 when gold prices dropped significantly, gold strength remains at record highs. Aside from weakening fundamentals, the broadening liquidity injections from global central banks are contributing to gold’s push to new record high against the US dollar at $1,032 per ounce as well as record highs against all major currencies. There is, however, the possibility that significant declines in US equities will prompt funds to realize their gold gains to meet margin calls in their credit and equity books. In this case we’d expect sharp dollar gains versus GBP, AUD and NZD.

Canadian Dollar to Remain Broad Loser

In our Sunday evening note we mentioned the CAD to be the broad loser in the current market turmoil partly due to the resulting decline in oil from $111.76 high to $110.14 as the global economy comes under threat. The close relationship between the Canadian and US economies is also contributing economy to CAD’s losses. USDCAD seen regaining 0.9950 targetting 0.9980, with support standing at 0.9890 and 0.9850. CADJPY dropped beyond our 96.80 target to 96.40 before rebounding to 97.70. We expect renewed losses towards 97.20 and 96.50.

Sub-100 Yen is Here to Stay

Remarks from Japanese officials referring to the need for coordinated measures were the only source of temporary yen retreat. Barring any temporary corrective measures to as 97.30 and 97.60 yen, we expect USDJPY to find renewed losses towards 96.30 and 95.80. Our month-end forecast is now at 97, followed by 94 before end of Q2. Looking at a 13-year monthly chart of USDJPY, we note that the lows of 2005, 2000 and 1995 were all preceded by a rebound due to Fed rate hikes. Since rate hikes are currently out of the question, we should see further declines to as low as 90 by year end.

EURUSD Supported By ECB’s Silence

The lack of any meaningful interventionist remarks from the ECB underlines the euro’s strength. After hitting an all time high of $1.5904, EURUSD stands at 1.5775, finding support at 1.5720. We expect subsequent foundation at 1.5660. Resistance starts at 1.5840, but upside capped at 1.5880. The 9.15 am release of the US industrial production figures expected at -0.1% from 0.1% will steer short-term interest in the pair, especially if a decline of more than 0.2% is in the works.

EURCAD settles at 1.5645 after surpassing our 1.5715 target to 1.5805. We see renewed gains towards 1.5680, followed by 1.5730.

Sterling’s High Yield Catches Down with it

Sterling drops across the board as the high yielding currency is increasingly expected to lose its yield luster from the current crisis, which will hit an already weakening UK economy. GBP drops from $2.0228 to $1.9995, exceeding our Sunday evening target of $2.0070. The Bank of England’s decision to inject a special loan facility of GBP 3 billion was also responsible for the currency’s damage. GBPUSD faces renewed losses back to $2.0030, followed by key double bottom at $1.9980. We expect the foundation to be broken, calling up the $1.9955. Upside capped at 2.0080.

If you wish to read this report in its entirety, please submit the required information in the link here.

Ashraf Laidi
CMC Markets Plc
http://www.cmcmarkets.com/usfx

Legal disclaimer and risk disclosure

Although obtained from sources believed by us to be reliable, CMC Markets and its affiliates cannot guarantee the accuracy or completeness of the information upon which this commentary is based. This commentary does not purport to disclose the risks or benefits or entering into particular transactions and should not be construed as advice in any specific instance.The views in this report constitute our judgement as of this date and are subject to change without notice.

Key News

• Fed Cuts Discount Rate, Lends More to Avert Meltdown (Bloomberg)
• JPMorgan Agrees to Buy Bear Stearns for $240 Million (Bloomberg)

Key Reports Due (WSJ):

• 8:30a.m. Mar NY Fed Manufacturing Report. Expected: -7.4. Previous: -11.72.
• 8:30a.m. 4Q Current Account Balance. Expected: -$184B. Previous: -$178.5B.
• 9:00a.m. Jan Treasury International Capital Flows. Previous: $45.2B.
• 9:15a.m. Feb Industrial Production. Expected: -0.1%. Previous: +0.1%.
• 9:15a.m. Feb Capacity Utilization. Expected: 81.3%. Previous: 81.5%.
• 12:00p.m. Jan Chicago Fed Midwest Mfg Index. Previous: +0.1%.
• 1:00p.m. Mar NAHB Housing Market Index. Previous: 20.

Quotable

"Holy Cow!"

Harry Caray

FX Trading - Things are Heating Up!

I hope you’ve strapped on your body armor. Even though it’s only Monday I’d be willing to bet we’re in for quite a battle as the week pushes on.

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

The Fed got the pushing and shoving started with its weekend festivities. Just last night they decided to cut their Discount rate by 25 basis points. Their hope: make it easier for commercial banks to borrow money, shore up balance sheets and become more willing to lend.

This action comes on the heels of Friday’s Bear Stearns news. Basically, the Fed agreed to help ($30 billion worth of help) JPMorgan Chase buyout Bear Stearns who was nearing collapse.

The Fed’s ultimate goal is to stabilize markets and revive the flow of liquidity. They seem very determined, and I suspect the measures they’re taking will eventually achieve this end. But right now fear is dominating market sentiment.

Despite the rescue efforts, the Fed is helping us to realize just how concerned they are about the economy and the markets. They’re accepting serious liability with the Bear Stearns bailout. The $200 billion being offered in its Term Securities Lending Facility is another form of this. They’re taking on many forms of collateral in exchange for their funds.

Granted arrangements such as these aren’t completely new. The Term Auction Facility they instituted back in December was a similar plan. But with each additional step they take in cleansing the market of the "bad stuff" and getting commercial banks and other firms back on their feet, the Fed reigniting investors’ fears. In doing so they may be unable to avoid some of the adverse reaction they’re intent on preventing.

Adverse Reaction

The risk-taking assets are most in danger of panic sell-off. I’m not saying we’re in panic mode yet, at least not on the whole, but these investments definitely are feeling the pressure. Equities have become a good barometer for risk. They do well when risk-taking is prevalent; they do poorly when risk-aversion dominates.

In the currency arena it’s the ComDols that get smacked around - specifically the high-yielding Australian and New Zealand dollars whose values rise when investors dump borrowed money in their direction. Risk-aversion, however, sucks these borrowed funds right back out and impacts these currencies’ value in the other direction.

And let’s not forget about the U.S. dollar. It’s continually being beaten up for the opposite reason. The Fed, with all its economy-saving tactics in play, is undermining the buck. Each downward adjustment in the Fed Funds rate is like another shot at the dollar’s knees. Since August that rate has been cut down from 5.25% all the way to 3%. The widening yield-differential is a huge disadvantage for the buck and has become the primary reason for its record-breaking descent.

Unfortunately, tomorrow the Fed Funds rate might stand closer to 2% than 3% when the FOMC wraps up this month’s monetary policy meeting.

So where do investors go at a time like this? I think you’d have to agree that much of their money is going to the few "safe-haven" plays still available - think Japanese yen and Swiss franc. Money is also flooding into assets that will help counteract the negative impact of inflation - think crude oil and commodities.

But you know as well as I do that there’s one such investment that typically satisfies both criteria. I’m talking about gold. I don’t have too much else to say about the yellow metal except look at this chart, it tells the story.

It’s tough to say when the current market dynamic shifts, or when the dollar finally changes course. But keep your ears open for talk about central bank intervention - a combined effort to buy dollars. That may be the only thing to slowdown the dollar’s decline.

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

Currency Currents is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to forex and futures should be strictly the money you can afford to risk. While every effort is made to evaluate the actual experience of subscr ibers, all performance figures must be considered hypothetical, and past results are no guarantee of future performance. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

The global financial markets are extremely nervous as the week starts,. The Japanese yen is sharply higher across the board, with steepest fall in carry trade pairs like AUD/JPY and NZD/JPY, following another round of sell off in global stock markets. USD/JPY dives to as low as 95.77! EUR/JPY and GBP/JPY tumbles to as low as 152.08 and 192.62 respectively. Dollar dives to new record low against Euro at 1.5902, against Swiss Franc at 0.9634. However, Aussie and Sterling are both dragged sharply lower by respective yen crosses too.

In an emergency meeting on Sunday, Fed lowered the discount rate by 25bps to 3.25% to "lowers the spread of primary credit rate to 1/4 percent point, and increased the maximum maturity of primary credit loans from 30 days to 90 days. Also, Fed voted to authorize New York Fed to create a lending facility to "improve ability of primary dealers to provide financing to participants in securitization markets." The move by the Fed is clearly an indication that Fed is increasingly concerned about the deepening of credit market problems which, will be intensified by further housing market contractions. Markets are nervous that there will be another Bear Stearns, which was sold to JPMorgan Chase over the weekend.

Note that while some retracements are seen as markets enter into European session, there is still not sign of even a short term top in yen and swissy, no any sign of top in EUR/USD yet. A number of economic data from US will be released today, including Q4 current account, empire state index, TIC capital flow, industrial production and NAHB housing market index. But impact from the data will probably be mild as focus remains on news relating to the credit markets problems.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 198.47; (P) 201.81; (R1) 203.71; More

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

GBP/JPY tumbles sharply to as low as 192.62 as the week starts today. 200 psychological level was firmly taken out without looking back. Mentioned 100% projection of 213.48 to 203.47 from 207.97 at 196.96 was also taken out firmly too. Recovery from 192.62 suggests that an intraday low might be in place but still, as long as 198.34 resistance holds, further decline is still expected. Break of 192.62 low will indicate fall has resumed to next important medium term support zone of 190 psychological level, which is close to 161.8% projection of 251.09 to 219.32 from 241.35 at 189.94

In the bigger picture, an important medium term top is formed at 251.09 after completion of a medium term head and should top pattern (ls: 241.47, h: 251.09, rs: 241.35), with the medium term trend line support taken out too. In other words, the whole up trend from 148.19 should have ended at 251.09 already and deeper medium term decline could be seen towards the rising trend line support (now at 174.16).

On the upside, above 203.47 support turned resistance is need to indicate that GBP/JPY has made a short term bottom. Some sideway consolidation could be seen with risk of rebound to 213.48 resistance or above. But still, medium term outlook remains bearish as long as upside is limited there.

Forex News Digest

Dollar Doomsayers Draw Growing Evidence From Bernanke Drive to Lower Rates

Dollar Slumps Most in 8 Years Against Yen on Widening Credit-Market Losses

Canada’s Dollar Declines on Concern That Credit-Market Losses Are Widening

Swiss Franc Rises to Dollar Parity for First Time as Investors Avoid Risk

Asian stocks and dollar sink on Bear rescue and Fed cut
Mon, 17 Mar 2008 04:46:00 GMT from ABC News

Dollar weakens in volatile trade
Mon, 17 Mar 2008 04:36:00 GMT from Sydney Morning Herald

U.S. dollar decline intensifies
Mon, 17 Mar 2008 04:22:00 GMT from Malaysia Sun

Oil Hits Record $111 as Dollar Slumps
Mon, 17 Mar 2008 04:17:00 GMT from CNBC

Dollar’s plunge pushes eurozone past U.S., Goldman Sachs says
Mon, 17 Mar 2008 04:17:00 GMT from China Post

Dollar torment could match earlier crises, analysts say
Mon, 17 Mar 2008 04:17:00 GMT from China Post

Dollar plunges to fresh lows against euro, yen
Mon, 17 Mar 2008 04:12:00 GMT from Philippine Daily Inquirer

More Forex News

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	Japan Tertiary industry index Jan	0.70%	0.70%	-0.60%
5:00	JPY	Japan Leading indicators Jan	36.40%	N/A	30.00%
8:15	CHF	Swiss Retail sales Y/Y Jan		2.70%	1.20%
10:00	EUR	Eurozone Employment Y/Y Q4		N/A	0.30%
10:00	EUR	Eurozone Employment Y/Y Q4		N/A	1.90%
12:30	USD	U.S. Current account (usd) Q4		-184.2B	-178.5B
12:30	USD	U.S. Empire state mfg Mar		-5	-11.7
13:00	USD	U.S. Net LT TIC flows Jan		50.0B	56.5B
13:00	USD	U.S. Foreign treasury buys Jan		N/A	1.44B
13:15	USD	U.S. Industrial prod’n M/M Feb		-0.10%	0.10%
13:15	USD	U.S. Capacity utilisation Feb		81.30%	81.50%
17:00	USD	U.S. NAHB housing mrkt index Mar		20	20

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Asian Morning Update

European releases on Friday:

	Forecast	Actual
February
Bank of France Business Sentiment	106.0	107.0
Euro-zone CPI (MoM)	+0.3%	+0.3%
Euro-zone CPI (YoY)	+3.2%	+3.3%

European data remains stable with CPI still high but not yet out of control. The Bank of France reported that business sentiment ticked higher over February which is in line with industrial data but the CB also revised Q1 GDP lower by 0.1% to +0.4%. They identified a slower order book but not excessively and still maintain that French industrial activity is still on an upward path.

States releases on Friday:

FOREX is a serious game. Play it with the pros.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Easy-Forex? Others offer promises. WE deliver.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.



Forex online. Without it, you are wasting your time (and money).
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

Control your destiny.
Forex trading involves substantial risk of loss, and may not be suitable for everyone.

	Forecast	Actual
February
U.S. CPI (MoM)	+0.3%	+0.0%
U.S. CPI (YoY)	+4.2%	+4.0%
U.S. CPI Excl food & energy (MoM)	+0.2%	+0.0%
U.S. CPI Excl food & energy (YoY)	+2.4%	+2.3%
March
U.S. University of Michigan Confidence	70.4	70.5

Data from the U.S. was modestly good - and by that I mean it wasn’t bad. However, clearly it was dwarfed by fears over Bear Stearns and its exposure to Carlyle Capital and to the sunprime in general. This caused other banks shy away from providing any financing and bringing Bear Stearns close to break point.

Friday saw JP Morgan providing financing to Bear Stearns but only with a guarantee from the Fed. The stricken investment bank commented, ‘Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction.’

Over the weekend the WSJ has reported that Bear Stearns is closing in on a deal to sell itself to JP Morgan, it would appear to stall a potential rout in the markets before they open later today. The sale price being suggested by the newspaper is almost half of Bear Stearn’s $4.08bn value.

This comes on the day that attempts to revive the Carlyle Group failed and American International Group is urging regulators to change controversial accounting rules on asset valuations to stem the tide of writedowns that have wreaked havoc on Wall Street.

Elsewhere the WSJ also revealed that 36 of the 51 respondents in a survey consider the U.S. economy to already be in recession and they feel it will be worse than the ones in both 2001 and 1990-91.

The Dollar tumbled for the rest of Friday and into the Asian open which has seen a new 12 year low against the Yen and record lows against the Euro and Swissie.

In response the Fed has acted one day earlier than the FOMC meeting and cut its discount window by 25bps to 3.25% effectively immediately. In addition it has also created a facility to let primary dealers borrow at the discount rate at the NY Fed and has increased its maximum maturity of discount window loans to 90 days from 30 days.

This has allowed modest recovery in the Dollar but unless there is some announcement from JP Morgan concerning the buy out of Bear Stearns fear will continue to rule.

The fear will be a similar fallout as seen following the Junk Bonds in the 1980’s.

It is very difficult to give an outlook for today. Technically the Dollar has reached my long term targets and even a little beyond. In general momentum conditions are overstretched but this means nothing if the Dollar doesn’t recover. Indeed, the downside could even accelerate.

It is recovering following the Fed’s action but so much depends on the outcome of the talks between JP Morgan and Bear Stearns. Even then there will still be a significant window where market fears will heightened with the threat that further incidents will occur.

With the current sentiment one can only favor the downside. If there is any recovery in the Dollar it would come quite sharply. However, I can only see one way this can happen and that is from central bank intervention. This is not impossible but it seems as if, until now, there has been a large measure of reluctance to do so…

More later once the daily analysis has been done…

There following releases are due from Asia due today:

Japan - January
Tertiary Industry Index (MoM) +0.7%
Leading Economic Index (F) 30.0%
Coincident Index (F) 22.2%

Ian Copsey
Global Forex Trading
http://www.gftforex.com

DISCLAIMER: This forum and the information provided here should not be relied on as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. The views of the author are not necessarily those of Global Forex Trading, its owners, officers, agents or employees. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Cornelius Luca will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Cornelius Luca do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.