News and views
Risk appetite recovers on Geithner testimony. The US dollar found support in the London morning as risk aversion was reinforced by the IMF’s prediction that global credit losses would reach $4.1 trillion by end-2010, but DXY fell -0.3% by late NY and risk currencies rallied in New York, with help from Treasury Sec Geithner. He testified that the “vast majority” of US banks have more capital than needed and said he sees signs of “thawing” in credit markets. Such sentiment helped US equities rally steeply from early losses, SPX closing +2.1%, including a 10% rise for the banks index.
NZD/USD joined in the risk recovery, from 0.5540 to 0.5640. This left AUD/NZD chopping in the low 1.26s.
AUD/USD bounced from a London low of 0.6976 to burst above 0.7100 and retained these gains into early Welly/Syd.
EUR/USD gyrated only modestly higher, rebuffed above 1.2980 then easing to 1.2955. Not surprisingly the safe haven yen was sold, USD/JPY squeezing from under 98.00 in early London to 98.80. The central banks of Sweden and Canada shaved their benchmark rates to 0.50% and 0.25% respectively. USD/CAD rallied to just above 1.2500 but then retreated to the 1.2350 area. BoC’s plans for QE are due Thursday. Treasuries sold off, the 10 year yield bouncing from 2.78% to 2.90% as equities rallied and there was some disappointment over the scale of Fed purchases ($7.0bn).
No US data to report.
German ZEW analyst sentiment rises from –3.5 to 13.0 in April. The current index slipped from –89.4 to –91.6, reflecting very weak economic data, but expectations picked up to a 2 year high, probably reflecting the stronger stock market and optimism that the full force of monetary, fiscal, G20 and other policy measures will ultimately restore confidence in financial markets and the broader economy.
UK RPI inflation falls below 0% yr for first time in 50 years. The combination of base effects (last year’s energy price gains dropping out of the calculation) and falling mortgage rates pulled the RPI down from 0% to –0.4% yr in March. However the preferred CPI inflation measure, which does not include mortgage costs, eased from 3.2% yr to 2.9% yr.
Swedish Riksbank cuts rates 50bp to 0.50%, and suggests that policy may not be eased further (“further reductions will have relatively small effects on the economy” – Governor Ingves).
Bank of Canada cuts 25bp to 0.25%, and commits to hold rates there for a year. We expected the cut, but the BoC went one step further by committing to remain on hold until mid 2010, conditional on the inflation outlook. This extra step was made in an attempt to hold longer term rates down, given that the BoC has said it cannot cut its policy rate any further. The BoC expects Canadian GDP to shrink 3% this year and core inflation to remain below target for more than two years. An announcement re quantitative easing is expected Thursday when the BoC will publish its next Monetary Policy Report.
Canadian wholesale sales fell 0.7% in Feb, their fifth consecutive decline, consistent with the economy entering recession.
Outlook
This move downwards has built momentum during the past few sessions, with the next target 0.5450. Should global equities continue to soften this week, 0.5200 is foreseeable. This morning’s immigration data is expected to show strength from returning expatriates, but is unlikely to impact the markets.
