Is the USD loosing support after Freddie and Fannie seizure?

The US treasury is providing the tourniquet and bandages to stem the flow of bleeding from Capital Markets. Seizing the GSE’s is supposed to provide the ultimate solution in tackling the housing and financial debacle in the US, and when betting, the odds usually favor the house, but, in this case it is not inconceivable for the house to go ‘bust’!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.

News of Paulson’s plan to nationalize the GSE’s is dominating the direction of Capital Markets. It will take weeks before we can truly comprehend the net effect of the largest financial bailout in history. Initial reactions from the skeptics do not see it as a permanent solution; it is not a ‘saving act’ but a purchasing ‘stop gap’ for the next US administration to deal with. They current government is not permanently recapitalized the entities, but providing a temporary band aid. This action cannot afford to fail; there is ‘no other’ solution to shore up the housing and credit market debacle with so many interested global parties involved. The weekend announcement is good news for the US economy. It is suppose to eliminate a large source of financial uncertainty, reduce US mortgage rates, boost the availability of housing finance and strengthen the greenback by making government guarantees on GSE debt. Paulson has made available an unlimited borrowing facility to guarantee liquidity to both entities and is willing to pump up to $100b of new equity into each of them (only if their capital base should fall below the regulatory benchmarks). Treasury has ensured that Freddie and Fannie will have the ability to fulfill their financial obligations ‘regardless of whatever losses or write-downs they might continue to suffer from the housing meltdown’. They also indicated that they will allow the GSE to ‘moderately increase’ lending. The market has to now decide if Paulson efforts will ‘breath new life’ into the markets. There is no other solution tabled, for Capital Markets this has to work.

The US$ currently is lower against the EUR +0.10%, GBP +0.02%, CHF +0.10% and JPY +0.46%. The commodity currencies are mixed this morning, CAD +0.06% and AUD -.0.56%. Canadian building permits surprised to the upside yesterday (+1.8%) and did very little to support the loonie. Despite higher commodity prices the Canadian currency continues to flounder in ‘no mans’ land. Initial support was seen after the US government stepped in to support the GSE’s over the weekend. Canada exports over 70% of goods to its southern neighbor. The upbeat market confidence rubbed off on the loonie, but has been short lived. Canadian fundamentals of late remain weak and commodity prices seem to be artificially held up by ‘nature’ which does not bode well for its future value. Friday’s employment data has some ways to go to reverse the losses of June and July (-60K combined). One cannot get too excited by growth of +15k jobs that still leaves the 3-month trend down by -45k. This data provides stronger evidence that Canada’s labor market has lost much of their positive momentum. Traders for the time being are better buyers of USD’s on pull backs.

The AUD found renewed pressure O/N (0.8144) as global equity losses convinced investors to pare holdings of higher-yielding assets for now. The market continues to digest and understand the seizing actions of the US government of the GSE over the weekend. Investors are concerned that the takeover of Fannie and Freddie will not end losses for financial institutions or avert a global slowdown.

Crude is lower O/N ($104.89 down -145c). Hurricane Ike dominates crude prices. The depression, devastating parts of Cuba is setting sail for the Gulf and delaying the resumption of oil production in the Gulf of Mexico. This could provide a bid for the black stuff and lift prices from its 5-montly lows that we printed O/N. Oil companies continue to keep employees onshore (the ones who were moved out of the path of Hurricane Gustav last month). Analysts predict that 80% of the region’s oil output and 70% of its gas production continues to remain shut. Experts believe that there’s a significant potential for damage to facilities in the region if the storm gathers strength again in open water. So weather watching will remain the order of the day. Crude lost 8% of its value last week and it seems that the threat of further hurricanes is the only fundamental factor that’s keeping the ‘black stuff’ from trading below the psychological $100 a barrel. Maybe the biggest factor this week will be the OPEC meeting, which starts today in Vienna. It looks like OPEC wants to maintain this downward pressure (they supply 40% of the world’s crude) by keeping their foot on the oil production peddle to maintain this record setting pace. All this despite some members (Venezuela and Iran) wanting to trim supplies. Gold remains to have a better undertone ($801) after the US government seizure of Freddie and Fannie, speculators are happy to purchase the yellow metal as an alternative investment for now (a hedge against inflation if they need to print more money).

The Nikkei closed at 12,400 down -233. The DAX index in Europe was at 6,297 up +34; the FTSE (UK) currently is 5,505 up +58. The early call for the open of key US indices is higher. The FI market was caught short after Asia’s initially reaction to Paulson’s announcement to the GSE’s problem. The yield curve printed 5-monthly highs before the whip lash effect managed to snap treasury prices higher from their lows. Yields of the US 10-year ended the session easing 1bp from Friday’s close (3.69%) and are little changed O/N. Initially treasury prices fell as traders were happy to take on more risk, thus reducing the appeal of government debt despite the weaker data of late. It’s all about perception and the consumer confidence; skeptics have their doubts and do not believe that this is the final chapter in the global tsunami; hence the FI market remained bid.

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