As the markets continue lower, its as though the central banks are attempting to "average down" and will eventually find what appears to be a solution in a natural bottom, although I anticipate the bottom to be in place for some time. FX markets were hampered by poor liquidity overnight and escalating risk aversion forced risk currencies AUD NZD GBP towards new lows. GBPUSD was particularly hardly hit as the pair traded to well below 1.68 from 1.71-the pair has now lost over 3.5% in less than 18 hours. Please refer to my blog on why the GBP will fall into 09. USDJPY was also hit, trading in a range of 97.91-99.85 before stabilising and please refer to my blog on why JPY will continue to rally :) meanwhile EURUSD was range-bounded between 1.3509 and 1.3625.

Overnight, newswires reported the US government is now considering guaranteeing billions of dollars in bank debt and discussing temporarily backing all U.S. banking deposits and adopt more emergency measures designed to backstop bank debt to free up interbank lending. The FED is spending more bad money after bad, which got us into this mess in the first place. These proposals are similar to the UK Treasury's plan announced earlier this week and the US government confirmed yesterday that relevant authorities are already discussing the idea with their British counterparts. Systemic risk continues to threaten the global financial system and a coordinated approach by the G7 to strengthen the banking sector is urgent, yet we caution against expecting any immediate agreements.

Meanwhile, the International Monetary Fund has activated an emergency financing mechanism to lend to countries facing severe difficulties as a result of the current crisis. The body announced that it would be willing to lend to any nation, regardless of developing or developed status. Although markets are now pricing in expectations of a deep recession, a severe lack of confidence and trust in the financial system is forcing through further de-leveraging and this is likely to remain unless blanket protection is extended to all banks. Convergence in policy responses to the current problem is likely but markets are displaying little appetite to wait for solutions, choosing to liquidate risk at every possible opportunity, supporting safe havens across the board. In addition, another round of coordinated easing in the immediate future cannot be ruled out as the world's key central banks are now fully committed to undertake extreme measures. The market has ditched rate spreads while diverting their attention entirely to the finacial markets. Ahead today, trade balance (cons -$59bn, prior -$62.2bn) and import price index (cons -2.8%m/m, prior -3.7%) are due.

Ref: UBS

Gold: Comex gold closed 884-85 after a high of 892-93 and low at 880-81. Strong selling straightaway made the first move lower. As in previous sessions, though, today's dip ran into buyers again, leading to a decent bounce. Poor psychology in financial markets in general and good physical demand should keep gold supported at 880-85.

Where there is crisis there is opportunity. Stand by!

Today G7's schedule (All times listed are in Washington local time/GMT)
0830/1230 - French Economy Minister Christine Lagarde speaks on the credit crisis at the Council on Foreign Relations.
0830/1230 - Eurogroup President Jean-Claude Juncker delivers welcoming remarks at a conference on the euro sponsored by the Peterson Institute for International Economics and BRUEGEL
0845/1245 - EU Economic and Monetary Affairs Commissioner Joaquin Almunia speaks at euro conference
0900/1300 - Group of 24 ministers meeting.
0930/1330 - ECB Executive Board member Lorenzo Bini Smaghi speaks at euro conference.
1000/1400 - Inter-American Development Bank holds seminar, 'Impact of Financial Crisis on Latin America'.
1015/1415 - IMF Managing Director Dominique Strauss-Kahn speaks at euro conference.
1240/1640 - ECB Governing Council member Christian Noyer speaks at euro conference
1400/1800 - Finance minister and central bankers from Group of Seven nations meet.
1515/1915 - Media briefing by G-24 Chair.
1515/1915 - ECB Executive Board member Lorenzo Bini Smaghi participates in IMF seminar on oil prices.
1700/2100 - South African Finance Minister Trevor Manuel participates in IMF seminar on impact on developing countries of economic slowdown among Group of Seven nations.
1845/2245 - U.S. Treasury Secretary Henry Paulson holds post-G7 news conference.
1945/2345 - ECB President Jean-Claude Trichet, Eurogroup Chairman Jean-Claude Juncker and EU Economic and Monetary Affairs Commissioner Joaquin Almunia hold news conference.
TBA: Other G7 delegations hold news conferences.
TBA: G7 holds 'outreach dinner' with Russia.

Here we go.

Chris Lori

Tags: Risk