That was a very nice breakdown. My short came out alright after all.

105 was tested, breaking the floor we'd seen defended in the 105.10/30 range. We're oversold now and correcting, but technically I would say the downtrend is setting up to resume. On the other hand, I am primarily a fundemental trader and very wary of taking either long or short while this bailout is up in the air. It is going to be the decider as to which way USDJPY breaks out for real and it will be violent in either direction.

I may set up a new short with range trading in mind on a rally that fails at the 61.8 or 50 fib. But I am watching the news closely.

The time of the signing of the plan is not "pretty" as Bush said. there is still uncertainty here, so I closed at 105.86. I still think it can pass over 106.00 before reaches my stop 105.40, but just took what I got.

45 pips is a good day in my book! I went short at 106.15, with 105.75/50 area as a target. It's looking like the bailout is going to be put through the wringer next week. Markets will not like it. I would expect more risk aversion until it sounds like a real deal.

It looks like we are getting the last big push for the day in this USDJPY advance. I think we are going to to see liquidity drain into the weekend starting around 17:00 GMT.

After what happened with the USDJPY's gap two weekends ago, I would not hold any positions going into the close this Friday. We are almost guaranteed to see some big movement when the market's open Sunday evening as the market will either respond to a good or bad bailout plan; or the US government will let the world down and continue bickering and fears of an ongoing crisis will be revived.

All that being said, what do you guys think will come of this bailout plan debate? I think they will probably have something agreed upon and signed by Saturday; but that it will have a bunch of conditions and a far smaller number ($150-300 billion) attached to it.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

For what it's worth, I am plugged into the political scene enough to get some of the behind the scenes rumors and leaks. The House Republicans are not likely to capitulate and let the White House get a big debt limit increase. They are instead at present pushing a government insurance program that MBS, etc could be enrolled into and the holders would be paying an insurance premium on them.

The Treasury will not accept it, and so deadlock seems likely. The Republicans have the votes to stop anything from leaving the House of Reps. [Edit: They killed the economic stimulus package that was voted on today as a warning to the democrats.] Politically, they cannot allow the White House to have their deal. They would be instant road kill at the polls in November. Voters are *screaming* at all of the senators and reps on the phones, faxes, etc about the moral and fiscal implications of the bailout. The longer this drags on, the more likely this public pressure will erode political will.

So, my take is that the market is being way too optimistic about this. They think it is a no-brainer, but its not for the politicians who have to answer to the average voter -- who will be voting in just a couple months. I think there is 50/50 chance they are still at a stand still Monday morning, or the bill they introduce for a vote is nothing like what the Treasury wants. Their argument that civilization as we know it will end is not being taken seriously. Initially it was, but not now.

On a different note: What exactly would the market consider a 'good' bailout or a 'bad' one. It seemed at the beginning of the week, that the market was concerned about the size of the layout. But at the same time, it wants to see something. What would 'it' think is worth rallying massive over?

Well, I taken the small profit on the 106.15 short. Very tempted to leave it on, but have a habit of expecting the market to react to fundamentals rather emotional headlines and getting burned. I shall not this time.

This crisis really has come at the worst time possible. No one wants to vote for something that looks like it is bailing out Wall Street. The average citizen has no idea though that if this isn't fixed it will hit them hard relatively quickly. Jobs will be lost, small businesses will be closing their doors, incomes will shrink and we will generally experience a very painful recession - one that is global and not just in the US.

I'm very surprised that the republicans are holding things up. You would think the small business owners that generally making up a large part of their constituency would be calling them to push the proposal through.

In the end, it needs to be done; and the consequences of not putting it through would be far worse. We need to hang up the politics of it and just do what we know will help the economy in the long run.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Yes, it is very terrible situation. I think if they could do something incremental and work out a regulation regime of these securities (MBS, CDS, etc) and wind down the failing banks slowly, they could avoid just throwing so much money away. So I think there is much blame to go around. The Treasury's original draft was asking for a national default at some point in the future (IMHO).

The House Republicans are the most vulnerable this election because of how terrible being associated with President Bush is at this point. If they appear to ally themselves with him, they are not going to get re-elected. The Democrats may well be setting themselves up for a big turnover for supporting it. But they may also be looking at doing what it takes regardless of that.

Either way, this will be a big political event as well as economic. It is likely to determine how the elections turn out, there is so much ill-will towards both the national political parties and the corporate elite they appear to be protecting. Many people are very cynical now, believing it is all being orchestrated and the conflict is a show. But my take it that there is now political chaos breaking out as well as financial. Does not bode well.

But this assumes the TRICKLE-DOWN Theory, that handing over billions to rich companies/CEOs/Banks/investment banks/ will somehow TRICKLE-DOWN and create jobs and help the little guy. Sadly the trickle-down-theory has been blown off time and again and proven not to work.

If the govt wants to help the citizens then it can create a direct mortgage transfer program through FHA, defer the mortgage payments or structure it differently, take away the debt liability of small businesses on to itself through SBA (just like they are trying to do to big companies) until they recover. The government can directly help the people. Why does it have to be done indirectly? Why does it have to be at the cost of handing out billions to James Baker's AIG or other big organizations with direct connections to politicians?

This is the Greatest Train Robbery that is going on. Nothing less! A $700 billion could provide free housing to millions of people for tens of years and completely eliminate any and all foreclosures. Or eliminate ALL of the debt piled up by small businesses that form the backbone of this nation.

Why should the little guy get the short end of it everytime? The story about "sky will fall if we don't act within hours" is for public consumption, just like how the patriot act was rushed without hearing in Congress.

I expect the pair to rocket to 95.00+ once carry trade accelerates after the US House approves the bailout.

I agree with your general sentiment; but I can play the devil's advocate to get the other side of the argument.

First of all, IMO, the little guy does not get the short end of the stick. In this, they are making out pretty well. Sure the banks made these mortgages into derivatives and the rating agencies gave them undeserved rankings; but the individual American deserves an equal part of the blame for taking on mortgages they knew they couldn't afford. Honestly, I don't think the home owners, banks, lenders, rating agencies, or anyone else involved should be bailed out - as they fail because of their own choices. However, that isn't reasonable because the entire economy can fail because of it.

Beyond that, in arguing that the government should not focus on helping the banks; we have to consider that they are essential to anything the consumer does. We want savings accounts? We want checking accounts? We want car loans or mortgages? That all depends on banks. If the credit market is still in turmoil, then banks will have to increase their lending standards and put more of their funds into reserves - so normal ppl can't get loans. What's more, they will have to be exposed to greater counter-party risk, so the rates we see on savings or any other investment will decline dramatically.

With the Fed and Treasury looking to help banks, what they are really doing is trying to fix the credit market and assure ppl that it is okay to have counterparty risk so that conditions can go back to normal.

And, as for needing to help the consumer specifically - I agree absolutely. However, there are already suggestions that they will do this. In the preliminary proposal points that went through, there seems to be agreement that the government will be able to change loan agreements (like turning a adjustable rate mortgage that had that good teaser rate into a fixed rate mortgage with yield that is more inline with what can be expected in times like these).

Nothing good can really come out of this situation. We are bailing out people that made bad decisions it will cost the country and arm and a leg; but things could get much worse, and we need to decide which scenario is more costly. Doing too little is worse than doing nothing at this point.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

The plan didn't pass. But I think there must be something else the Fed can and should do to rescue, they will not just let the system collapse.

What do you think, John K. ?

Edit: will they vote second time or Bush can sign it directly? I don't know.

I really hate being right about this sort of thing, but one is better assuming it will collapse than not. It is function of how history plays out at this point. Hopefully, they will be able to stabilize things enough that it will look more like a stair step than a plunge. We shall see. <sigh>

The Fed increased the 84-day short-term TAF injections to $225 billion (total auctions are up to over $600 billion) and the facility has been extended to April 30th. So, there is still a lot of liquidity in the market. However, we really need stability in lending confidence. Otherwise, we will see rates continue to degrade and investment trends freeze.

President Bush can't push it through. He can only veto bills.

Congress will likely come back with a revised plan in the next couple of days; and this time around they should wait until they know they have the majority before putting it up for vote (that was irresponsible, as it just creates more market panic when it is voted down); and the provisions in the second version will likely be much smaller (the smaller they are, the less effective it will actually be).

Not a good outcome. The market would have better off not ever hearing about a bailout at all at this point...

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com