The U.S. Treasury Secretary recently appointed, Timothy Geithner, on Tuesday announced the broad outline of the long-anticipated bank rescue scheme. The market was not impressed and risk aversion reasserted itself through the safe-haven currencies, in particular USD and JPY.

The bank rescue scheme announced consists of four distinct parts:

1. Recapitalizing bank balance sheets through a Financial Stability Trust;
2. Removing toxic real estate related assets from those balance sheets through a Public-Private Investment Fund, which avoids the bugaboo of nationalisation;
3. Deepening available credit through a Consumer and Business Lending Initiative, which will target loans for auto purchase, small business initiatives, commercial real estate, higher education, etc.; and
4. Addressing the housing market, which has been in freefall since December 2007, through a plan to be announced within the next few weeks.

The cost of the programme could easily top US $2 trillion (approximately AU $3 trillion at current rates).

As previously stated, at the scheme’s announcement, investors ran for the exits. According to Bloomberg online, stock markets slumped around the globe—Argentina, Australia, Brazil, Colombia, France, Germany, Japan, Mexico, Peru, Russia, the U.K., Venezuela, and others. In the U.S. itself, the stocks of all thirty major corporations comprising the Dow Jones index fell for a total loss of 4.6%, while only nine of the 500 stocks within the S&P index printed in the black. It was the single worst market day since the inauguration of the new president and administration. LIBOR rose, although not to the astronomical highs reached in spring 2008, and the TED spread remains elevated.

More specifically in the forex trading market, the yen reigned supreme. USD/JPY appreciated against all of the G-10 currencies, gaining as little as 0.64% against the Swiss franc and as much as 4.49% against the Australian dollar, while the USD regained much of its former position as a safe-haven currency, rising against eight of the G-10 currencies and losing ground only against JPY (1.24%) and CHF (0.52%).

This sudden resumption of risk aversion has the potential to affect forex trading for the remainder of the week and perhaps longer should investors not recover their confidence quickly. Worth particular attention are:

•    The U.K. unemployment rate (3.8% expected) and jobs change (−88K expected), to be released Wednesday 9:30 AM GMT (8:30 PM Canberra time) and the inflation report, due an hour later;
•    The Australian unemployment rate (4.7% expected) and jobs change (−18K expected), scheduled for release Thursday 12:30 AM GMT (11:30 AM Canberra time); and
•    The Eurozone GDP for 4Q2008 (−1.3% q/q and −1.1% y/y expected), due out on Friday 10:00 AM GMT (9:00 PM Canberra time).

Heightened risk aversion, if sustained throughout the forex trading week, would tend to exaggerate currency movements against USD and JPY, and contain some spillover onto related crosses. Especially if any of these fundamental announcements surprise to the downside, the potential exists for these currencies to fall strongly against the safe-havens.

Particular emphasis can be placed on the Eurozone GDP announcement, as the German GDP release (−1.8% q/q and −1.3% y/y expected) is due out three hours earlier and will serve as a bellwether.