Credit markets are seizing up again. Credit spreads blow back out and USD still looking shaky as world watches and waits for TARA.

• New Zealand Q2 Current Account Deficit to GDP ratio out at -8.4% vs. -7.9% expected
• Japan Aug. Adjusted Merchandise Trade Balance out at -¥113B vs. -¥126B expected
• Australia Aug. HIA New Home Sales out at -1.3% MoM vs. -7.2% in Jul.
• Germany Oct. GfK Consumer Confidence out at 1.8 vs. 1.5 expected and 1.6 in Sep.

• Sweden Aug. PPI (0730)
• Sweden Aug. Household Lending (0730)
• Sweden Aug. Trade Balance (0730)
• US Aug. Durable Goods Orders (1230)
• US Weekly Initial Jobless Claims (1230)
• UK BoE's Barker to Speak (1240)
• US Aug. New Home Sales (1400)
• New Zealand Q2 GDP (2245)
• Japan Aug. National CPI and Sep. Tokyo CPI (2330)
• US Fed's Fisher to Speak (2330)
• EuroZone ECB's Gonzalez-Paramo to Speak (2345)

Market Comments

TARA is the new and catchier term for Paulson's "bailout plan" and it's an acronym to remember: Troubled Asset Relief Act. This program will go down into history as the largest and most important government led financial experiment since the New Deal program spearheaded by Roosevelt during the Great Depression. Tara was also the name of Scarlett O'Hara's plantation home in the iconic American novel Gone With the Wind. Let's all fervently hope that this TARA prevents the world financial markets from being swept away by the windl... TARA is the end of the beginning of a process that will continue into the next presidential administration and will see a radical transformation of the entire financial landscape. This transformation will make the old way of doing things gone with the wind as well. We can only guess what the new regulatory regime will bring us. For now, we can only say that tomorrow is another day...

For now, the next immediate focus beyond TARA will likely be the remaining 800-pound gorilla of the failed credit market: Credit Default Swaps - more on that in future comments. As well, the hedge fund industry will be undergoing a radical downsizing as many of its strategies only worked in the days of the inflation credit bubble when markets were "orderly" and spreads miniscule, allowing tremendous leverage. And those hoping to profit on the deflation of the bubble face regulatory wrath. The hedge fund unwind play can have dangerous effects on volatility - especially in the short term, not only due to the market conditions in general here, but also due to liquidation needs by funds at quarter end here at the end of September.

Back to the short-term view: The USD pushed back a bit stronger yesterday as promises by Congressional leaders made it clear that the TARA act will like be passed before the end of the week. This relief had limited effect however, as credit spreads have blown back out and continue to express a complete lack of faith by banks in their counterparties: the US Libor vs. 3-month T-bill benchmark, for example, is almost back to its record levels from last Thursday. The worry may be that, even with the passage of TARA, there are simply too many unknowns here for the market to decide whether it will "work". See the excellent commentary by Jonathan Weil over at Bloomberg today for some of the potential pitfalls of TARA.

There is a disconnect between some of the economic numbers rolling in and the eventual fallout of what we are seeing in credit markets at the moment. Consumer confidence numbers have actually been rising lately!  Is this due to the fall in petrol prices over the last two months?  Any remnant of the petrol price affect will likely fade quickly: this last round of convulsions in the credit market have probably begun to reach critical mass at the "man on the street" level and growing disquiet could have a viral affect on the general outlook for the future. Still, it is remarkable that the weekly US ABC confidence number continues to show an uptick for the latest week. The coming Christmas shopping season will be the ultimate test of the degree to which the the developed world's profligate consumer continues to blithely spend money or begins to retrench and bite the bullet. Another question is the state any overextended consumer's credit lines will be in come Christmas. It is already virtually impossible to get a car loan at the moment in the US.

JPY has been a bit weak in the crosses, due to higher yields and commodities as we have mentioned, but also as Japanese banks are getting in on the "vulture capital angle" with purchases of partial ownership in troubled banks (Morgan Stanley for example) and possible speculation of additional flow of that type. Still, we have a very hard time seeing much scope for further JPY weakening beyond the shortest term. EURCHF is another curiosity with its ability to levitate at these levels....

As long as the tremendous uncertainty on various systemic crisis scenarios, it appears that the USD will remain under pressure. We can focus on the 55-day moving average of EURUSD, up toward 1.5000, as a possible next resistance.

Charts: USDJPY and EURUSD

EURUSD survived a brief consolidation lower yesterday and appears ready to rally back to new highs and beyond to a test of the 55-day moving average up toward 1.5000.

USDJPY
After its brief spasm higher in the wake of the announcement of the Paulson plan, USDJPY reversed lower and now seems to be finding consistent resistance at the 200-day moving average. A fall back through the 103.00 "neckline" area could set up a further run toward 100.00.