| US Dollar, Japanese Yen Up as Financial Concerns Spark Sell-Offs in Risky Assets Around the World
The US dollar and Japanese yen maintained their strength against the majors, with the exception of the British pound, as Moody’s ratings agency warned that the eastern European banking system was increasingly vulnerable to a “steep and long economic downturn,” and that western European banks with locations in eastern Europe may face ratings downgrades. The decline in risky assets, like equities, was not helped by President Obama’s signing of the $787 billion stimulus package at the end of the day, as details for the reformed version of the Troubled Asset Relief Program (TARP) have yet to be revealed. In US economic news, the New York Fed’s “Empire” index plummeted to a new record low of -34.65 in February from -22.2, adding to indications that the manufacturing sector is suffering at the hands of weakening demand both domestically and abroad. The breakdown of the report followed similar trends to what we’ve seen over the past 6 months: declining prices, persistent contractions in new orders, and signs of additional layoffs. Meanwhile, net long-term TIC flows for the month of December rose a greater than expected $34.8 billion, up from -$25.6 billion in November, as foreign investors increased purchases of equities, notes, and bonds. | Today, the UK calendar contains the CBI Industrial trends for February and the Minutes from the January meeting. However, after the inflation report published last week, we don’t expect the minutes to yield much additional new info from the markets. At the start of 2009, EUR/GBP made a forceful correction after the spectacular gains mid-December. EUR/GBP tried to recapture the longstanding uptrend, but the pair ran into resistance in the 0.95 area and another forceful correction even sent the pair (temporary) below the key 0.8840/00 neckline/support area. This was an important warning signal, but there was no sustained follow through price action. From a fundamental/ LT point of view, we remain sterling cautious. The BoE policy announcement on quantitative easing justifies this bias, we think. Ongoing pressure on the banking sector is no help for sterling either. Last week, EUR/GBP tested the high profile support (0.8663 area previous high) but the test was rejected and the pair rebounded above the 0.8840 Neckline. This rebound called off the short-term alert in EUR/GBP and makes the picture neutral again. Today, eco calendar contains the housing starts and the industrial production data. After the closing of the European markets Fed’s Bernanke will speak on the Fed’s lending programs. Among other things, markets will look out whether the Fed president announces the buying of US Treasuries by the Fed. If so, the market reaction of the currency markets is not that easy to predict, but from a fundamental point of view, this should be considered as dollar negative. However, safe haven considerations currently dominate the market and these are obviously dollar positive. Since the start of the year, EUR/USD was on the defensive. The deterioration of the European government finances and the widening intra-government spreads continue to weigh on the single currency. The euro also continues to be a pointer of global risk aversion. Negative headlines on the development of the credit crisis most often had a negative impact on the euro. The US eco story is also far from brilliant, but the dollar most often takes advantage from its safe haven status. Over the previous two weeks, the EUR/USD decline shifted into a lower gear but any attempts to change the trend immediately ran into resistance. The renewed flaring up of risk aversion and the market fear that the deepening of the crisis in Central and Eastern might cause an new adverse loop for the European economy and its financial sector caused EUR/USD drop below the 1.27 support area yesterday morning. |
| NZD fell with the EUR yesterday afternoon, and continued on during the European session, finding a base around 0.5060. AUD’s made successive lows in Europe and NY, reaching the 0.6360 area. Demonstrating AUD’s higher correlation with risk, the AUD/NZD cross weakened to around 1.2490. EUR’s plunge started around 2pm NZT, falling 1.5 cents in minutes. The European session’s track was less pronounced, petering out at the 1.2560.area. The weak US Fed index reading and the stronger German ZEW report both had little market impact. After initially following EUR, GBP went against the trend, courtesy of a firmer-than-expected CPI, up to around 1.43 before resting at the 1.42 level. JPY has lost its safe-haven identity for now, weakening to around 92.50; perhaps the bad run of recent data, and the Finance Minister’s resignation, raising questions. US New York Fed “Empire State” index. The first of the four regional Fed factory surveys turned sharply weaker in February to a new cycle low after the modest improvement of January. The 6-month outlook question responses showed continued deterioration. The NY Fed headline is a separate question about business conditions, not a composite of the detail, which was not quite as weak. Yes, orders were down, but shipments and jobs both posted higher (but still negative) outcomes in February. That mitigates some of the pessimism we might otherwise derive from this report. |
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