The dollar and yen are the biggest casualties of the government's latest rescue package to a struggling US bank, this time in the form of guarantees up to $306 bln of Citigroup's assets, as well as injecting extra $20 bln from the TARP package. Improved risk appetite is further highlighted by gold's surge to a fresh 6-week high of $822 per oz, gaining over $80 since Friday. We continue to favor gold over oil as global demand destruction takes a toll on energy prices and precious metals benefit from central banks' liquefying of the financial system. News of Citigroup's rescue along with reports of a stimulus package form the President-elect Obama in the tune of $175 bln will provide an important counter to today's potentially negative report on US October existing home sales.

Citigroup's Bailout Fills Autos' Void for Now

Citigroup's bailout is also proving effective in offsetting any prolonged damage from the lack of resolution regarding a rescue package struggling US automakers. The scheduling of the Sunday night announcement of Citigroup's rescue was partly aimed at preventing further market damage at the beginning of the week, which was the case of the first Fannie Mae/Freddie Mac bailout in early July. Although markets' positive response to government interventions have proven short-lived, we expect Friday's rally to extend into more protracted advance into mid December, which could be accompanied by the seasonal reversal in foreign exchange markets. These market moves would likely take the form of a temporary rebound in GBPUSD, EURUSD and USDJPY towards $1.54, $1.31 and 98 yen respectively. Accordingly, gold may prolong its gains towards its 200-day moving average of $880/oz. Oil prices could also be lifted towards the $62-$64 level, especially as OPEC reiterates that the Nov 1 supply cut was not enough. December rate cuts by the Fed, ECB and BoE will also act as catalysts to these risk appetite-driven flows.

Tuesday's release of the US preliminary (1st revision) Q3 GDP is expected to show a revised decline of 0.7% from the initial drop of 0.3%. Consumer confidence, personal income/spending and new home sales will complete the data schedule for a holiday-shortened week.

One way of highlighting the strengthening role of risk appetite on currencies is the EUR's complete shrugging of the worst than expected IFO survey from Germany. Although the IFO index hit a 15-year low, the euro rallied on the Citigroup news, which was a boon for higher yielding currencies relative to the USD and JPY. A best case scenario for the euro this week would be a resolution between Congress and US automakers, in which case could drive the pair to as high as $1.30. Nonetheless, an argument against this scenario carries significant weight as US Congress is already mulling a second stimulus package to revive the economy in addition to the TARP designed at bad debt. Interim resistance stands at $1.2855, while support pushes up towards $1.2720.

Sterling advances on new tax exemptions included in the pre-budget report as well as the latest burst in risk appetite. Cable eyes the interim resistance at $1.51 at which we could interim retreat towards $1.5020. Key resistance stands at $1.5250.

USDJPY is seen recovering the 96 level as US stocks open to the upside. Key test is seen emerging at 96.75, which will be partially determined by the duration of the latest rally in equities. We expect support to climb towards 95.50s, providing a base for heftier gains towards the 97.

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