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Dollar Wobbles as Nationalization of Citi Looms

Last updated 2/23/2009 6:02 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• US government may take up to 40% of Citi
• Asiain stocks higher but Tokyo drops
• RBS to break itself up in two units
• OIl at $39.29/bbl
• Gold back off $1000/oz at $987/oz last

Overnight Eco

• NZD Credit Card Spending -2.2%
• EUR Italian HCPI lower at -1.70%

Event Risk on Tap

• CAD Core Retail Sales expected at -2.0%

Price Action

• USD/JPY recovers off Asia lows of 92.80 all the way to 94.40 as dollar firms into Europe
• AUD/USD trades best all night long above 6500 as dollar weakness helps
• GBP/USD trades to 1.4600 as anti dollar sentiment swells
• EUR/USD runs close to 1.3000 on Citi nationalization moves, but cant hold the highs as ECB concerns weigh

As the week began the dollar was in retreat for a second session in a row after a Wall Street Journal article suggested that US government may take a 40% equity stake in Citigroup moving ever close to nationalization  of the bank.  Fears over nationalization sparked a vicious short covering rally in EUR/USD on Friday as currency traders believed that such a course of action would increase sovereign risk for the greenback by expanding the liabilities of US taxpayers.     The initial reaction to nationalization may continue to prove dollar negative, but we find the argument of dollar bear dubious at best.  Under nationalization Citi equity and bondholders would be the ones to suffer the most, while the US taxpayer could in fact profit in the long run if the US government were to pick up all of Citi’s global infrastructure at pennies on the dollar and then recapitalize that asset ultimately creating value.

Instead, we believe that much of the dollar weakness over the past few days has been the result of conflicting and vacillating policy signals from the Obama administration. Markets hate uncertainty and indecisiveness most of all and President Obama’s. slow, meditative, compromise leaden approach to solving the banking sector problem has been a sore disappointment to the type of clear, decisive executive leadership that many investors were seeking.

Despite  lingering  concerns over nationalization, the EUR/USD& nbsp; lost most of its gains as European trading headed into early afternoon as worries over European financial sectors own problems continued to offset the dollar negative news.  Comments by several ECB officials that further rates cuts are likely along with very sharp declines in Italian CPI gauges  all conspired  to keep the euro well below the1.3000 figure as the trade in the pair remains essentially a race to the bottom.

The pound, however was the one unit that continues to show relative strength against the buck as evidence grows that UK economy may be the first of the G7 members to get its house in order and  stabilize. Tonight’s news that RBS will divide its company into two parts effectively spinning off the bad asset portion of its portfolio was another sign that UK financial corporates are beginning to tackle their problems.  EUR/GBP once again broke the 8800 level and remains one of our favorite plays as we believe the cross could move towards 8500 as markets continue to be disappointed by the upcoming European data.

The North American calendar carries only Canadian Retail Sales which are likely to miss to the downside given the weak results in Wholesale Sales last week. The US session  could see more churn in the EUR/USD with trading likely to be dominated by news our of Washington rather than Wall Street as traders seek clarity on the nationalization plans.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.