YB FX Daily Report – 29th July 2009

YB FX Daily Report – 29th July 2009

The meteoric equity rally over the past couple of weeks took a breather yesterday, as both European and US equity markets finished lower on the day. Further falls were seen in Asia overnight, the Chinese market falling a mammoth 5% on the day. Whether this is a brief pause or signals a more pronounced revision of expectations will remain to be seen (though European equities have opened strongly this morning), however given some of the record breaking gains up to yesterday it was somewhat inevitable - the Nikkei by this point had had a nine-session winning streak, the best in 21 years, while the Hang Seng index in Hong Kong was above 20,000 for the first time since the Lehman Brothers collapse.  As expected, this had the effect of strengthening the safe-haven currencies, as GBP fell against the Yen and the Dollar.

Though the appetite for risk showed signs of faltering, suggestions are that the underlying mood remains cautiously optimistic given the spate of recent earnings releses and signs that Asia is recovering faster than  Western economies - one striking figure being that, in annualised terms, growth in the volume of Chinese steel production shifted from -12.5% in October 2008 to +14.4% by June 2009 - staggering given the size of the economy. With automotive production historically deemed "the industry of industries", markets will also have taken note of the unforeseen (though modest) profits reported by Honda. Furthermore, bullish comments from the RBA in Australia prompted speculation that rate rises may be on the horizon, the AUD reaching a 10-month high against USD on the back of this.

Such is the influence of risk appetite in these times that a report released earlier this week revealed that the average daily turnover in the UK foreign exchange market fell by a fifth in the six months to April as volumes slumped during the financial crisis, largely due to a reduction in speculative trades and a willingness to leave capital invested in the relative safety of the Dollar/ Yen. Indeed, average payment instructions peaked in October as investors rushed to quit riskier assets. The graph below essentially shows the strength of the world's major currencies as weighted indices against each other over the past two years - note the relative tranquility pre-Lehman crash and the subsequent havoc thereafter, with the Yen the huge winner (and the proud Pound buckling):

Today, the UK awaits figures on personal lending, mortgage approvals and on money supply (which may provide direction on the success of the QE program), whilst the US has releases on durable goods, further mortgage applications and the release of the Fed's Beige Book, though this may hold fewer surprises than usual given Fed Chairman Bernake's report last week.

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