Brave New World

FX Update- Few signs of flattening-back to safety 15/04/2009

The market has taken an indecisive turn with recent economic and corporate indicators. Surprises abound, with Goldman Sachs reporting better than expected Q1 earnings, while US retail sales data took the wind out of the markets sales, showing a worse than expected decline of 1.1% in March. News this morning that UBS was planning a further cut of 7,500 jobs added to the unease, although most investors are clearly cautious about calling a bottom to the market. In this climate of uncertainty, the EUR has be the currency to take the greatest punishment. After a bearish night in Asia the single currency has suffered at the hands of both Sterling and the Dollar. A story in today’s Daily Telegraph reported that one third of European junk bond credits could default on debt given that there was no prospect for pick up in demand for exports. The EUR had earlier reached a high of 1.33 against the USD before comments from the ECB’s Weber that indicated the central bank would announce a package of non-standard measures (read quantitative easing) in May; valid for the rest of the year and into next year. At the same time he said that cutting the benchamark refinancing rate below 1%  would risk paralysing the money markets. 

In the US, talk of a flattening of the downturn (as per Larry Summers and President Obama yesterday) may still prove premature, with much of the data released surprising to the downside. US Capacity Utilisation in March reached a lower than expected 69.3%- a new record- whcihle industrial production came in at -1.5% against an expected 0.9%, and a reading of -1.5% in February. Consumer Price data was -0.4% y/y compared with 0.1%. However, there were some encouraging signs, in the form of the Empire survey, which showed a significant improvement to -14.65, compared with the market expectation of -35. This may indicate that inventory drag is beginning to be worked off and that demand is beginning to stabilise, albeit at significantly lower levels. 

In the UK, the RICS house price survey showed the house price balance rising to -73.1 in March; in line with expectations. Sterling performed strongly against the USD, briefly breaking the 1.50 level, and the EUR with EURGBP breaking below 0.88 from over 0.89; a sharp sell-off for a traditionally low volatility currency pair.  Sterling looks bid at the moment, with signs that it could break out further against the EUR. A report shows that that options market is the most bullish on sterling for four years. With both technical and fundamental indicators working against the Euro, shorting EURGBP remains the favoured trade. Given that the 0.88 level has been broken, the next key level of 0.8770