Brave New World

FX Weekly View 18/04/2009

FX Commentary– Risk appetite continued to rise this week, but only just. Equity markets have posted their sixth consecutive weekly rise, with the S&P gaining 1% to 867 and the FTSE 100 gaining 2.6% to climb above the 4000 level. The continued buoyancy in the market has been helped by some key Q1 corporate earnings numbers that surprised to the upside and economic data that suggests, in the US at least, that the pace of economic decline is slowing. Currency markets have largely reflected this buoyant mood with cyclical and commodity currencies like the GBP, AUD and CAD performing strongly. Sterling is performing well in this environment. In addition to its strong traditional high beta performance, the currency has benefitted from data showing that the domestic housing market and global financial services may be stabilising. The options market (expressed in risk reversal pricing) shows the strongest market support for the pound in four years.

By contrast the Euro, which has been very closely correlated to US equity market indices and hence risk appetite in the last six months, has been the G10 main under performer in the last week. Investors are not impressed with the continuing uncoordinated fiscal policy response by the various governments, but particularly Germany and France. All other Eurozone countries are being tarred with teh same brush. Moodys announced this week that it was expecting to lower Ireland’s credit rating, despite drastic action taken by the government there to rebalance the economy and tighten its fiscal deficit.  In monetary policy the ECB appears to be showing greater signs of disagreement among its members over the next steps forward with regard to interest rates and quantitative easing. To add to the mix, Trichet implicitly talked down the Euro for the first time.  Currency markets responded accordingly. The EUR ended the week lower against most currencies, breaking its relationship with global risk appetite. Until such time as there is more concerted effort to boost aggregate demand and put inflation worries to one side the Euro looks likely to take Sterling’s place as the weakling.  

The US Dollar looks set to benefit from further recovery in sentiment or a flight to safety. This week’s rally in both equities and the dollar looks set to confirm the market’s expectation that the US will exit recession before other developed nations. Tics data out earlier in the week shows renewed capital inflow into the US markets; away from government debt to equities and credit. In times of crisis the safe haven trade still remains.

USD: Bullish

EUR: Bearish

GBP: Bullish

JPY: Bearish

Technical levels and trade recommendations to follow……..