Brave New World

FX Outlook 21/04/2009

News

• German ZEW data- a measurement of investor sentiment- is much better than expected: a 2 year high of +13
• German Producer Prices fall 0.7% in March- largest fall since Sept 2002 and below market expectation of 0.3%. 
• UK Consumer Price Index fell to 2.9% from 3.1% in February. Signs of price stabilisation in non-core component
• Bank of Canada surprises market with 25bps cut in interest rates to 0.25%. Says will maintain rate for one year

Commentary

Following yesterday’s return to sharp return to risk aversion yesterday, witnessed in a rally in the USD and JPY, today’s price action has been more mixed, with country specific indicators providing sentiment support, while worries over the US banking sector, global consumer demand and doubts over the extent of the recovery in China are strengthening the case of bears in the market.  The German ZEW index was sharply higher for April, leading to a rally in EURUSD up to 1.2990 before falling back on on negative corporate news from the US. The ZEW is not the most important indicator for sentiment, given that it is investors rather than corporates or consumers who are surveyed and as such is less representative of the ‘coal face’ of the German economy. Lower than expected German PPI figures are more important as yet another argument for lower interest rates can be levelled at inflation hawks, and so increase the chances that the divided ECB will take a more aggressive stance following their next meeting in a few weeks. By contrast in the UK, the GBP may have benefitted from figures released this morning showing some stabilisation in inflation; specifically a rise in the non-core RPI in March of 1.7% from 1.6% in February previously. Such stabilisation suggests that the Bank of England can afford to pull back once the current quantitative easing measures end in June.  Strong results from Tesco and Burberry Group have given investors confidence that the worst of the downturn in the UK is over. Retail Sales figures at the end of the week will give a clearer picture. At the time of writing risk appetite looks to be reappearing with the USD giving back most of the gains it made against EUR earlier in the European afternoon. US Treasury Secretary Geithner’s comments that most banks have more capital than they need is USD negative. The US Dollar looks like re-establishing its role as the safe haven currency for the time being. As mentioned in previous posts, US corporate earnings over the next couple of weeks and news about the health of the US financial sector and consumer will prove decisive in the direction of the Dollar. However, the risks remain most definitely to the downside, and so now may be the opportunity to establish new Dollar long positions, particularly against the EUR.

Trade Recommendations

EURUSD: Bias- Short. Target 1.2880

GBPUSD: Rangebound: Strong rally today to 1.4700 should be followed by consolidation

USDJPY: Bias- Long. Target 99.70