What is the takeaway from all this?

It would seem the events of the last several days culminating in the demise of Lehman and the loss of independence of Merrill Lynch will only further intensify the deleveraging trend that has been underway for some months and accelerating since mid-July. Clearly, China sees the global economy slowing to the extent that it felt comfortable reversing its years-long tightening cycle. Oil has fallen a further $7, down over 50% from its peak. This should keep capital flowing back into the US from the emerging markets for some time to come as return of capital overshadows return on capital.

Rate cut comes from an unexpected quarter

Talk about a sign of the times…China cut rates today in a dramatic turnaround from just a few months ago when authorities in that country were tightening credit in every way imaginable. Markets have further punished oil prices on fears of a macro global slowdown. Risk aversion has knocked EUR/USD and EUR/JPY for a loop, down dramatically from overnight highs.

One a day like today, liquidity will be very,very difficult to come by. Keep positions small and stops wide or you will just be making a contribution to someone else’s P&L…

Cross currents make for treacherous intraday trade

The degree of difficulty of getting a clear read of the currency markets is particularly tough today given a variety of factors impacting the markets. Dollar negatives include the still-unresolved situation at Lehman Brothers as US financial markets focus on their fight for survival. Even if that matter were favorably settled, the market would simply turn their focus to the next sickest firm, just as it did in turning from the GSE bailout on Monday to Lehman’s health Tuesday. Making this a difficult situation to trade is the fact that EUR/JPY tends to sell off when risk aversion rises, so EUR/USD becomes choppier than normal.

Oil prices are a factor today, as always, with OPEC trimming production a bit over 500,000 barrels per day. Ike is still headed for the Gulf and could skirt the oil and gas region.

The macro picture remains dollar supportive however as capital continues to flow rapidly out of emerging markets and back into developed markets, particularly in the US. Amplifying this effect is intervention from the likes of South Korea and Russia to prop up their local currencies and sell dollars. They then turn around and buy dollars against major currencies like the euro to maintain their reserve-asset mixes.

A broad consolidation in the 1.40/1.4250 range is favored against this unsettled backdrop.