Dollar Weaker as Bank Shares Pick Up Slack

Without meaning to sound like a football commentator yesterday’s trade was definitely “a game of two halves, John” with risky assets first falling from Tuesday’s poor US ISM reading and Wednesday’s poor German factory orders readout before rebounding as fears over the global banking sector eased.

Dollar benefited from haven flows in the morning session with 2010s first decline in German factory orders also weighing on the euro. More trade data from Germany has been released this morning with both the trade balance and current account numbers missing expectations by large amounts.
Trade balance fell to EUR 10.6bn against an expected EUR 13.4bn while the current account slipped to EUR 2.2bn from an estimate of EUR 11.4bn. Any more news of German trade troubles will continue to weaken the euro. It hasn’t had much effect yet however as speculators wait on today’s ECB announcement.

Focus was on Europe again yesterday afternoon after the details of ‘stress tests’ that European banks are to undergo in the coming weeks were published. Investors moved heavily into banking shares before the close on the belief that the uncertainty surrounding the sector would be nixed by these announcements. Publication of the results is expected in the next few weeks.

So equity markets finished on the front foot with the Dow Jones and the S&P 500 finishing 2.82% and 3.13% higher respectively. The Nikkei in Japan has benefited as well, just closing 2.8% in the green.
Overnight the dollar has continued to weaken with EURUSD hitting a high of 1.2688 and GBPUSD 1.5241.

The pound has managed to stay out of the spotlight over the past couple of days however news and economic flow won’t let it stay in the shadows much longer. Overnight the IMF have cut their growth expectations for the UK economy in 2010 from 1.3% to 1.2% on news of our recent austerity measures. They also cut their expectations for France.

We are very data heavy today with it being central bank day in the EU and the UK. We once again expect no movement in the rates from either party however Trichet’s press conference is more likely to act as a negative on the EUR in the short term as chatter of further QE in the Eurozone increases.
We think the Bank of England meeting will be largely GBP neutral. Other data releases include UK industrial and manufacturing production numbers at 09.30, German industrial production at 11.00 and the typical Thursday initial jobless claims. All in all we would think this is a general ‘risk-on’ day with equity markets and risky currencies gaining.

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