Brave New World

FX Review for 26 March 27/03/2009

Following the riotous price action yesterday afternoon the foreign exchange market has been very quiet, with the main pairs trading in narrow ranges in Asian and European morning trading. As was noted in an earlier post, US Treasury Secretary Geithner’s comments that the US would consider proposals to expand the IMF’s SDR led to a brief but almighty US dollar collapse. Thereafter followed a haste retraction, a restatement of the strong dollar policy and a USD positive reaction in the market. Subsequent comments in favour of expanding the SDR came from a number of important figures, notably IMF chief Dominique Strauss-Kahn and influential financier George Soros. The move to creating an international reserve currency away from the USD appears to be, in academic circles at least, a serious proposition but one which will ultimately take time to implement. It is important to remember that the creation of a reserve currency does isn’t necessarily a signal to sell dollars. The USD makes up 42% of the basket of the SDR whereas the EUR accounts for 36%. The sharp move up in EURUSD yesterday had little fundamental justification. 

In the UK retail sales come in line with expectations, with a drop of -1.9% in February versus the market expectation of 0.4%, bringing the annual rate of increase to 2.5%- the lowers since 1995. Market reaction was minimal. The forward looking Germany GFK sentiment index fell 2.4 in April from 2.5 in March. French Consumer confidence index in March came in at -43, again in line with expectations.

Equity market rally- this time it’s different 25/03/2009

Growth forecasts from China and the new Geithner plan give BNP’s Redeker cause for optimism.

FX Review 25/03/2009

As market commentators and some investors attempt to be calling an end to the bear market on the back of an impressive rally in equities, data from the real economy continues to deteriorate at an astonishing rate. The latest trade data from Japan, released overnight, shows a further collapse in exports; 49.3% in February from a year ago. The saving grace for the  JPY was piece of news was that imports also showed a similar dramatic fall, dropping 43% in the same period. This puts the Japanese current account in the positive territory for the first time in five months. USDJPY has grinded lower, from a high of 98.34 to 97.36, before recovering slightly. The jury is still out on the likelihood of the BoJ undertaking aggressive quantitative easing BoE and Fed style, with the Governor Shirakawa refusing to comment on that or the possibility of a zero interest rate policy. 

With little in the way of data the European morning has got off to a sluggish start. The most significant news has been the German Ifo business climate data which reached a new record low of 82.1 in March from 82.6 in February. This was in line with expectations and after an initial sell-off EURUSD rallied about 50 pips from 1.3480 to 1.3530. Earlier the EUR had reached a low against the USD of 1.342- a strong support level. 

In the UK the CBI Distributive Trades Survey showed a marked deterioration in March, with a reading of -44 compared with -25 in February. The news had little impact on the GBP, although the data points to a much worse than expected retail sales figure out tomorrow. A public spat between the Government and the Bank of England has developed following Mervyn King’s comments yesterday that the UK should be cautious at expanding the fiscal deficit. These comments came at the same time that Gordon Brown was beginning his world tour calling for a coordinated stimulus agreement at the G20 meeting. A government spokesman stated that a further stimulus would not be ruled out. This highly unusual public disagreement should bear down on the GBP as will investor nervousness over today’s failure of the today’s auction of GBP 1.75bn worth of 40 year bonds. Gilts have slumped on the back of the news. This is likely to greatly weaken Gordon Brown’s hand in his call for further stimulus measures.

FX Review 24/03/2009

Equity markets across Europe have are broadly flat in mid-morning European trading, after initially opening higher. Overall, risk appetite appears to be higher following yesterday’s stunning rally, with a Dow Jones up 6.8%. Overnight in Asia, the Japanese yen was the main victim of the change in sentiment, with the JPY rising from 96.5 to 98.0, and EURJPY rising to a 5 month high from 132 t0 134. However, given that JPY looked set to lose its safe haven status, the yen was likely to be weakened in any risk environment.

The EUR and the AUD appear to be the main beneficiaries from the new positive environment ignited by the Fed’s quantitative easing decision and Geithner’s plan to remove banks’ toxic assets.  The AUD has benefitted strongly in the last few days from the rise in commodities, on the back of a weakening USD. The RBA’s decision to keep rates on hold last week was accompanied by minutes suggesting that rates may still head lower if monetary easing was not gaining any traction. Given that rates are at 3.25% Australia is still some way off the need to introduce quantitative easing (QE). This has boosted the AUD, especially given what now looks like a QE race by other central banks. The European Central Bank is often considered to be the last refuge of the monetarist, and their central bankers would balk at any suggestion that they are about to enter the QE race. However, the EUR was chief beneficiary of the US money printing announcement last week and is increasingly looking like the new safe haven currency, with both the ECB and the main Eurozone governments advocating prudence on monetary and fiscal expansion. How long this stance can be maintained is increasingly open to question. Revised projections for German growth published yesterday show the region heading the way of depression- ridden Japan. The IMK, a German think tank, now expects Germany’s GDP to contract 5% in 2009 – more than double the expected fall back in January. This was by no means the worst prediction – Commerzbank expect a contraction in the region of 6-7% in 2009). The 5% rise in EURUSD last week will have tested the strongest of monetarist nerves in the European Central Bank. Definitive, surprising decisions is not the style of the ECB, but drastic times call for drastic measures and the effectiveness of the Fed’s move last week may given some European policy makers food for thought. The GBP has made gains against the USD and JPY but this has been less pronounced than the strength of the EUR or AUD. This morning’s surprising CPI announcement (up 3.2% y/y vs the expected 2.6%) was, according to BoE Governor Mervyn King, due to the sharp decline in sterling over the last few months. He expects renewed deflationary pressures over the next few months. The currency looks vulnerable at these levels against the USD, near the top of its range in the last few months. With Bank of England comments that there appears to be no improvement in lending the outlook overall is bearish.