YB FX Daily Report – 27th May 2009

YB FX Daily Report – 27th May 2009

To kick off with the tenuous (yet obligatory) sporting link, fans of Man Utd will tonight to replicate the impressions made on the international scene made by Sterling over yesterday and early today. If tonights preceedings stay strictly true to this analogy, it will be Barcelona failing to turn up that leads to their victory over any innate strength. Sterlings long recovery made significant ground again yesterday against the Dollar, Euro and Yen, attributed mainly to events on foreign shores rather than our own. Indeed, Sterling looks to have benefitted from an absence of data this week.

Yesterday, the Dollar's early gains came undone after consumer confidence indicators climbed by much more than expected. Boosting hopes of an economic recovery, US stocks surged, and as investor confidence rose, the Dollar's safe-haven appeal dropped. As investor confidence has picked up again, other risk sensitive currencies like the AUD and NZD have also benefited, testing their highest levels in nearly eight months versus the USD overnight. GBP/USD has already hit the notable 1.60 mark several times briefly this morning before retreating. Whether this rise will continue at the same pace over the next few weeks is a subject of debate, however it will be comforting for buyers of Dollars to see GBP/USD heading back to the ranges with which they are historically familiar.  

In the Eurozone, detailed GDP data released yesterday confirmed that the German economy contracted by 3.8% in the first three months of the year, its worst performance since records began in 1970. In year-on-year terms the economy contracted by 6.9%. This was also the fourth straight quarterly decline in GDP, underpinning the view that the Eurozone’s largest economy could contract by up to 6% this year. Speculation about the true health of Germany's financial system, whose share of global banking losses could still have considerable headroom, has also weighed on the Euro. The ECB this morning has not exactly moved to quash these rumours, with the slightly contradictory statement from council member Noyer that "banks' toxic assets had been well identified, even if there was always the possibility of a bad surprise".

Developments in North Korea, uncertainty over which has seen GBP/JPY rise from Y150 to Y152 over the last couple of days, may yet curtail some of the risk appetite that has benefitted Sterling. South Korean media reported that the North had launched two short-range missiles over the Sea of Japan yesterday and at least one more early this morning, after firing three on Monday. Kim-Jong Ils recent PR drive took a further knock with threats to end the long-standing truce with South Korea. The events in SE Asia have not exactly dominated the markets, but may well be given greater consideration over the next few days and weeks.

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