Brave New World

FX Review 25/03/2009

As market commentators and some investors attempt to be calling an end to the bear market on the back of an impressive rally in equities, data from the real economy continues to deteriorate at an astonishing rate. The latest trade data from Japan, released overnight, shows a further collapse in exports; 49.3% in February from a year ago. The saving grace for the  JPY was piece of news was that imports also showed a similar dramatic fall, dropping 43% in the same period. This puts the Japanese current account in the positive territory for the first time in five months. USDJPY has grinded lower, from a high of 98.34 to 97.36, before recovering slightly. The jury is still out on the likelihood of the BoJ undertaking aggressive quantitative easing BoE and Fed style, with the Governor Shirakawa refusing to comment on that or the possibility of a zero interest rate policy. 

With little in the way of data the European morning has got off to a sluggish start. The most significant news has been the German Ifo business climate data which reached a new record low of 82.1 in March from 82.6 in February. This was in line with expectations and after an initial sell-off EURUSD rallied about 50 pips from 1.3480 to 1.3530. Earlier the EUR had reached a low against the USD of 1.342- a strong support level. 

In the UK the CBI Distributive Trades Survey showed a marked deterioration in March, with a reading of -44 compared with -25 in February. The news had little impact on the GBP, although the data points to a much worse than expected retail sales figure out tomorrow. A public spat between the Government and the Bank of England has developed following Mervyn King’s comments yesterday that the UK should be cautious at expanding the fiscal deficit. These comments came at the same time that Gordon Brown was beginning his world tour calling for a coordinated stimulus agreement at the G20 meeting. A government spokesman stated that a further stimulus would not be ruled out. This highly unusual public disagreement should bear down on the GBP as will investor nervousness over today’s failure of the today’s auction of GBP 1.75bn worth of 40 year bonds. Gilts have slumped on the back of the news. This is likely to greatly weaken Gordon Brown’s hand in his call for further stimulus measures.