National Australia Bank Daily Currency Update 30th July 2009

National Australia Bank Daily Currency Update 30th July 2009

When the market has a particular narrative in it's collective hive mind, it can often ignore some outlying data that don't fit into the story they think, or wish, was happening. This can be seen with the recent rapid rise in the equity markets, with the big story being the economies reaching the nadir of the recession, and investors focusing on some better than expected corporate earning reports while ignoring some of the less than stellar broader economic data. The broad narrative of a slowdown of the recession still holds, however the equity markets have taken a hit as news come out of China, on Wednesday, that the Chinese regulators have instructed banks to put money into the 'real' economy rather than stocks and shares, as they see bubbles appearing in these markets. The warning caused sharp falls in Asian stocks, with the Shanghai index dropping 5%. The news sent the AUD falling down towards 0.81 against the Dollar, but the move seemed to be just a blip, with equities rising tentatively again yesterday. It should be noted however that the Chinese authorities, at least, think that the equities markets are overpriced, and if there is another sharp correction, then risk appetite is likely to contract and the Dollar will benefit.

The Dollar did benefit from the equities fall, and yesterday's small recovery in the stock markets has done little to bring it back down. The Euro sits just above 1.40 against the Euro, while the Pound has slipped back below 1.65, and it even fell below 1.64 before recovering yesterday on the back of a mildly positive Fed Beige book release. The fall in the AUD has allowed Sterling recover some of it's recent losses against the antipodean currency, as the rate has clawed it's way back above 2, but still remains vulnerable to rises in the commodity markets.

Sterling has remained relatively immune from the market correction, partly as it is no longer a high yielding currency, but also as we have had news of a third rise in house prices in the UK, although with the number of sales still remaining very low there is bound to be more noise in the housing data. There was some more mixed data from the details of the money supply, as banks seemingly still hold onto the extra cash that the government have pumped into the economy, with not as much of it as the government would like making it's way to circulating around the country. The Pound has made some big gains against the Euro, as the single currency is one of the hardest hit by the equity markets falls. There was some large one sided trades building up for the Euro, as the markets rose, with traders buying Euro's with the expectation of being bale to sell them at a profit in the future. The small correction has led many of the these speculators to liquidate their positions, which has allowed the Pound to climb above 1.17 against the Euro in this morning's trading.

It's a quiet day today on the data front, at least for the UK. In Euroland, they have the month end surveys which are likely to continue the trend of showing weakness, but some improvement. The survey's may give some shape to this morning's trading, but the markets are more likely to follow the equity markets, which will be testing their resilience to the recent market corrections.

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