Brave New World

Currency Review 08/05/2009

News

USD: Non-Farm Payrolls for April fell 539K, lower than the consensus forecast of 610K. Unemployment rate is at 8.9%, a 25 year high

EUR: German exports rose by 0.7% m/m in April, higher than the consensus forecast and the first rise in six months

AUD: RBA has revised down forecast for 2009 GDP growth to -1.0% from 0.5%

Commentary

The momentum of optimism in the markets has continued unabated today with equities moving higher on the back of data that, while hardly cheery, isn’t quite as dismal as a month ago. In the US the Non-Farm Payroll figures came in slightly better than expected, although 539 thousand jobs were still lost. Some fundamentals appears to show some decline in the severity of the downturn and even the occasional data shows recovery, such as the surprise decline in Australian unemployment in April. Such news is encouraging, particularly given that the full effects of the large fiscal stimulus measures have yet to be felt. However, despite some encouraging signs the global economy is still some way from the bottom of the downturn. Most independent economic forecasts predict a weak recovery in 2010 and for some years afterward, as the de-leveraging of the American consumer continues and global imbalances in savings and consumption are addressed. Instead, the market is acting as though we should expect a Alistair Darling style V-shaped recovery. For this 2 month market rally to continue economic data needs to outperform expectations for some time and, rather looking for hope in some second derivative market participants will require more Australian-style surprises before we witness a sell-off. EURUSD has recently begun to correlate strongly with risk appetite and direction in the equity markets. While it appears that there could be further for single currency to run against the greenback- perhaps targeting 1.40 in the next few weeks, the risks to a flight to safety remain. The US dollar may be down, but it not yet out. Better than expected German data helped support the euro, but the economic conditions remain weak and fiscal and monetary response remains weak.