Brave New World

FX Review 15/01/2010

The currency markets this week has firmly re-established one of the main trends seen in 2010; the inverse relationship between the US dollar and risk appetite. Although most of the G10 currency pairs traded in fairly tight ranges the price action of greenback showed the resumption of its as the most favoured funding and safe-haven currency. Earlier in the week, a boost to risk appetite, triggered by stronger than expected Chinese export data, coupled with positive Australian job numbers put the USD under pressure. The week has ended, however, on a decidedly more bearish note, with yesterday’s negative retail sales data from the US adding to the conviction among investors that any strong recovery in the world’s largest economy is still some way off.

A further factor weighing on risk sentiment was the continued concern over Greece and its ability to address its dire fiscal position. The ECB’s Trichet highlighted both the concern he had about Greece and ruled out any bailout, either by the central bank or another EU member. Moreove, German Chancellor Angela Merkel  is quoted as saying that she is not worried about the solidity of Germany’s finances because a law passed in her first term would ensure that public budgets were consolidated in the years ahead. However, she notes: “But what worries me … is whether all the euro countries will stick to similar stipulations.” She adds: “Who is supposed to tell the Greek parliament that it needs to carry out a pension reform?” She concludes: “In view of this the EUR is going to be in a very difficult situation in the next few years.” Her comments were briefly posted on the governments website before being removed. The government’s press department said that the comments were published accidentally. EURUSD has fallen to 1.4400, a low for the week.