Brave New World

FX Mid Morning Update 17/03/2009

The foreign exchange market has had a relatively quiet session in Asian and early European trading as doubts have emerged about the sustainability of the recent rally in equities. Although markets have yet to reverse the gains made in the last week, there appear to be signs that the recent rise is increasingly resembling a bear market rally, rather than a true reversal in sentiment. Overnight,  the Nikkei closed up 3.18% but the Hang Seng closed lower at -0.33%. European equity markets are also down slightly. The movement in the FX  market has been very closely correlated. The performance of the Dollar was almost perfectly inverse to the the Dow Jones, falling to lows against the EUR and GBP before rising at around the NY close. In the last 12 hours, the main currency pairs have been trading in a very narrow range. EURUSD, having twice above the key psychological level of 1.30 in the last 24 hours, has settled to a very narrow range of around 1.2980. Cable looks heavier although has displayed little price action, setting around the 1.4950 level. USDJPY, which many market participants had been predicting would breach the 100 level following last week’s SNB intervention has also remained tightly ranged bound, trading between 98.05 and 98.78 in the last 12 hours. Fundamentally, the evidence in favour of a sustained equity market rally- feeding risk appetite and so a sell off in the USD- is too flimsy. Unexpected news from the banking sectors has been the main driver- macroeconomic data remains dismal and government policy unclear.

Expect EURUSD and GBPUSD to remain biased to the downside. Any sustained break in EURUSD above 1.30 should see the pair target 1.3300. That is unlikely to happen without a strong rally in the S&P/Dow.                            

NEWS  

JPY: Finance minister Kaoru Yosano comments that both Japan and the world economy are on the verge of a deflationary spiral. The Tertiary activity index rose 0.4% in January – the first increase in three months and thwarting the consensus forecast for a 0.5% fall after a 1.6% drop in December.  

EUR: ECB Executive Board member Juergen Stark is quoted in Handelsblatt: “We have a little more wiggle room on reducing rates. To fix a threshold at which we will stop does not make sense in the current situation … For me personally though, the threshold is not far from where we are now”. Asked about pushing interest rates toward zero, Stark said such a step would not necessarily reactivate the interbank lending market and that there would be a danger that unprofitable investments were made and the foundation for new excesses established.

CNY: Former PBOC advisor, Yu Yongding commented that China should not lend a lot of money to the IMF because the cash would be used to bail out countries that are richer than China and are biased against Beijing. He said: “If we do so, it will seem like the poor is rescuing the rich, wouldn’t it?”

Key Event 10am: The German ZEW investor index came in at -3.5 (exp -7.7), better than expected. Eurozone ZEW index was -6.5 (exp -11.7). EURUSD jumped over 20 pips to 1.301 before settling back to around the 1.3000 level . The figures needed to be fairly significant to change the holding pattern in the market ahead of the US equity market opening. The ZEW surveys investor confidence, and so is less highly valued as an economic confidence indicator than other data surveying corporate sentiment.