Brave New World

Midday FX Update 18/02/2009

Investor sentiment has continued to deteriorate towards the economies of Eastern and Western Europe, with Credit Default Swaps for 5 year government debt continuing to widen, gold continuing to rise and reports questioning the ability of stimulus initiatives in the region to deal with an escalating financial crisis. EURUSD touched 10 week lows in Asia, reaching the below the 1.2560 level before squeezing higher to above the 1.26 handle. USDJPY edged higher, from an overnight low of 92.10 to the 92.80 level as Japanese data continues to astonish; the most recent data being a jaw-dropping 84% year on year drop in machine tools orders in January, with a large percentage of this decline coming from the auto industry. GBPUSD did not react much to the minutes of the BoE, released this morning, which showed a 9-1 decision to cut rates by 50bps. Blanchflower advocated cutting immediately to zero. No real surprises about quantitative easing, hence little movement. Earlier, GBP was weakened by reports in the Daily Telegraph that Standard and Poors was revisiting the UK’s AAA rating due to the scale of the bank bailout. GBPUSD had threatened to break 1.4300, before retreating to 1.4097 on the news. 

The market has plenty of fundamental data to absorb from the US today, particularly relating to the housing and manufacturing sector. Both building permits and housing starts are expected to post new record lows, as the housing sector suffers from poor demand resulting from tight credit conditions. Industrial production is expected to post an additional drop of 1.5% following a contraction of 2.0% in December. Such a dismal economic picture may add to an already bleak market sentiment, further boosting the USD. Later President Obama will announce measures to boost the housing market, through the subsidizing of mortgage payments. This may reverse sentiment or at the very least, drive up volatility in the FX market.