YB FX Daily Report – 1st of April 2009
Yesterday saw almost a mirror reversal of the day before, as stock markets recovered and the higher yielding currencies gained some poise. The news that Barclays declined to take part in the government asset-protection scheme, and withstood the Treasury stress testing, while Fortis bank outlined it’s viability to perform as an insurance group, helped financial stocks recover, with US banking stocks recovering 7.6%. leading the S&P500 up 1.3%, the FTSE climbed 4.3%, while the DAX rose 2.4%. The stronger stock market helped Sterling to climb against the Dollar, up above 1.43, and it is likely to continue it’s rally in the coming months.
Sterling also rallied against the Euro, climbing back towards 1.09, as the first flash estimate of Eurozone CPI came in much less than expected, at 0.6%, from a previous reading of 1.2%. With Eurozone inflation falling so rapidly it’s hard to see why the ECB have been so reluctant to cut rates or start QE measures, some in the market now see a definite risk of deflation in the Eurozone, which could prove disastrous. A rate cut at tomorrow’s meeting now seems certain, if it didn’t already, and with inflation heading for zero, there could even be some mention of QE, which would help the economy by increasing the money supply, and would also help stave of deflation by weakening the Euro and making imports more expensive.
There seems to be a general optimism in the markets that we have seen the worst of the GDP slump in the major economies, although the Eurozone GDP released in May will probably prove them wrong. The increased optimism has helped the Aussie dollar, which has jumped towards 0.69 against the USD, and kept to around 2.08 against the Pound. The AUD was helped by a rise in copper prices 4.3% , and comments from the RBA deputy governor who helped pare expectations of a rate cut next week, by talking up the Australian economy as one of the better performing economies in the developed world. It now looks likely the RBA will stay on hold next week, which could keep the AUD well supported.
The news today will be dominated by middle class children causing a ruckus in London, but if they really want to make an impact they need to look across the channel at the masters of direct action, the French; they’re either blockading ports with lorries, rioting in urban centres, or holding their managers hostage, and now even Sarkozy is displaying the French defining characteristic, by threatening to walk out of the G20 meeting if he doesn’t get his way.
The markets will be tentative today as they wait to see what, if any, actions come from the meeting, but there is some data out as well. A UK manufacturing survey has shown a contraction, but a slowdown in the rate of contraction is still taken as good news. Later on the Eurozone unemployment rate is likely to top 8.3%. this afternoon sees a manufacturing survey over in the US, as well as the unreliable indicator, to the unreliable non-farm payrolls report on Friday. None of the reports is likely to make a big difference as traders watch the reports from the G20, but the trend for the day already seems to be set, with Sterling climbing over 1.09 against the Euro, and up towards 1.44 against the USD.
Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital