--What it means for the USD and others

In an unprecedented move, key central banks cut their base lending rates by 1/2% (50 bps) in an effort to restore confidence to global financial markets. Led by the US Fed, the central banks of the Eurozone, UK, Switzerland, Canada, and Sweden all cut rates outside of their normal meetings. China's PBOC cut its base rate by 27 bps and lowered the reserve requirement. Japan's BOJ did not cut already very low rates, but issued a statement in support of the coordinated move. The moves came as stock markets worldwide went into a tailspin and credit markets remained frozen. Today's action comes on top of a series of individual national measures to provide liquidity and shore up the global financial sector, none of which have been able to stem financial market seizures. Officials from the G-10 vowed to continue to use all available measures to shore up markets, potentially suggesting additional interest rate cuts, and there lies a ray of optimism.

The result today was certainly not what policymakers hoped for, as stock exchanges failed to sustain an initial relief rally. Stock markets in Europe closed down about -6%, the UK's FTSE fell over -5%, but importantly all closed above their intra-day lows. In the US, shares see-sawed throughout the day and the benchmark S&P 500 ended up losing only -1.1%. The market reaction reveals investor sentiment at panic levels, but the minimal losses in the US session, and +2/+3% gains in Canadian shares suggest some panic may be fading as the global day winds down. From the candlestick charts, the S&P 500 today formed a 'star' pattern, which is a potential reversal signal after a large directional move lower. An upside gap, where tomorrow's open is above the real body of today's S&P candle, would serve as likely confirmation of the pattern and suggest a rebound may be in store. However, markets remain gripped by panic and fear, and when dealing in such an emotionally driven environment, it's next to impossible to divine where the bottom is. Keep in mind that today's developments are still being digested and the initial reaction is frequently the wrong reaction.

In forex markets, the primary reaction is in the JPY-crosses, like EUR/JPY, AUD/JPY, and GBP/JPY, commonly referred to as carry trades. As stock markets fall, the JPY tends to strengthen, sending USD/JPY, GBP/JPY, and the like down. When stock markets gain ground, USD/JPY and the JPY-crosses tend to move higher. Against other major currencies, the USD generally fared better on demand for USD from still frozen credit markets and on a flight to safety basis. If markets begin to stabilize and recover higher, it should be a positive for USD/JPY and the JPY-crosses, while the USD is likely to lose ground as fear and panic subside. If markets continue to slide, there is more downside in USD/JPY and the JPY-crosses and more upside for the USD against others.

Currency traders will be closely watching how stocks fare in Asia tonight, and since these markets had already closed by the time the coordinated rate cuts were announced, they have not had a chance to react. Given the absolute drubbing Asian shares took overnight, and the subtle trend of market improvement as today wore on, there is significant potential for a rebound in Asian markets. The key question will be if any rebound can be sustained. The first stock market to open on Thursday will be in NZ, followed by Australia's Straits Times index, and then the rest of Asian markets, though some will remain closed for Thursday. Also, the potential for intervention from the BOJ (selling JPY/buying USD, possibly others) is high given the inverse relationship between shares and the value of the JPY; should Japanese shares begin to collapse again, the BOJ may step in to buy USD/ sell JPY to support stocks.