Brave New World

FX Update 20/05/2009

JPY: Headline Q1 GDP -4.0% q/q – better than expected. Q4 2008 GDP revised down to -3.8% q/q

AUD: Surprising -4.3% fall in consumer confidence in May, sharp fall from +8.3% in April

GBP: CBI Industrial Trends survey shows slight improvement in May to -56 from -57 previously

GBP: BoE minutes shows unanimous decision by MPC to leave rates on hold. Talk of further QE measures

EUR: German producer prices in April fell 2.7% m/m- the fastest in 22 years

EUR: Spanish GDP fell -1.9% in Q1, the biggest contraction in half a century

CAD: Canadian consumer prices in April fell to 0.4% y/y- its lowest level in 14 years

US Dollar weakness set the tone today, with the greenback falling sharply against most G10 currencies, as currency markets ignored mostly bearish economic data, instead following stocks and commodities higher. The fall in volatility, as represented in the VIX index, helped to add weight to the idea that credit markets were returning to normal and the search for yield could resume. In a further boost to confidence, although one that was not entirely unexpected, US Treasury Secretary Geithner today announced the timetable, starting July, for the PPIP program to help rid banks of toxic assets. Currency markets, which had started slowly in the European morning session erupted with the USD dollar selling off sharply. A return to the demand for yield and expectations for a favourable economic climate helped all high yielding currencies, like the financial services dependent GBP, export dependent EUR and commodity based AUD. All three currencies were sharply higher, with EURUSD gaining about 100 pips in an hour, GBPUSD gaining 230pips, and AUDUSD gaining about 70pips. GBPUSD has one more technical obstacle- 1.5724- before targeting 1.60. The Japanese yen was a relatively latecomer in strengthening against the USD. As an ultra- low yielding safe haven currency the JPY was unlikely to capitalise in this market environment, but USDJPY managed to push below the 95 level, losing 100 pips from the open of European trading. The yen was probably helped by the better than expected Q1 GDP data, another sign that the economic decline is bottoming out .

Given how little effect poor economic data around the world had on sentiment today it appears as though the market is focusing on volatility, Libor, and the TED-spread. These measures alone suggest that the market has returned to pre-Lehman days. For currency markets the carry trade is set return. How that will manifest itself is difficult to say in these early days, although surely one of the more interesting trades suggested comes from Deutsche Bank- Short AUDBRL.