The buck gave up some ground in NY trading after rocketing in the overnight sessions. Risk aversion came off the boil with our in-house metric flashing the lowest read since early September (before the Lehman collapse). US Treasuries were shunned with yields adding to the huge Friday gains. The 2-year rose another 13 basis points to 1.42% while the 10-year paid another visit to 3.90%. Equities were better ''offered'' for most of the session but made their way back to flat with a sharp end of day rally. Some attributed the rally in stocks to comments from economist Paul Krugman that the recession will end in September. We fail to see how this differs from the mainstream view or why the market would react to comments from someone it tends to ignore. Remember that Krugman predicted a relapse in the US economy back in August 2002 and again in April 2003. Consequently, these proved to actually be the lows in the US equity market decline. The market went on to rally more than 80% (13% annualized) from there through the 2007 peaks. Let the record speak for itself.

While economic data was non-existent in the US, the eurozone news was mixed. The IMF released a report that suggests eurozone banks need to raise another $375bn in capital. This compares to $250-275bn for US banks and highlights what we have been saying of late – that the financial problems in the eurozone are worse than in the US. As these "skeletons in the closet" become more prevalent, we would look for EUR weakness to accelerate in the medium term. ECB members countered the pessimism somewhat. Weber said the ECB can "easily" exit its liquidity programs while Stark noted that the eurozone economy is no longer in freefall. The news from the IMF suggests the ECB may need to do more on the policy front and that the chance of a relapse in economic growth is not trivial.

The price action was most noteworthy in GBP/USD which surged more than 140 pips towards 1.6064 after noted stops were taken out into the 1.60 area. 1.58 proved to be excellent short-term support and we could be poised to trade in a 1.60/1.58 range for the time being. EUR/USD managed to eke out a 40 pip rally into the 1.39 pivot. It now sits between the 1.40/1.38 range and we would think a break to either side of these levels could see a more pronounced directional move. With all of the problems swirling in the eurozone and with the US economy ostensibly carving out a bottom in terms of the rate of decline, we would think selling rallies makes more sense than buying dips here.

Upcoming Economic Data Releases (Asia Session) prior expected

  • 6/8 23:01 GMT UK  BRC May Retail Sales Monitor  
  • 6/8 23:01 GMT  UK  RICS House Price Balance  MAY  -59.90%  -52.00%
  • 6/9 1:30 GMT AU  NAB Business Conditions  MAY  -10  - -
  • 6/9 1:30 GMT AU  NAB Business Confidence  MAY  -14  - -
  • 6/9 1:30 GMT AU  ANZ Job Advertisements (MoM)  MAY  -7.50%  - -
  • 6/9 5:00 GMT JN  Leading Index CI  APR P  76.3  77.2
  • 6/9 5:00 GMT JN  Coincident Index CI  APR P  85.1  86
  • 6/9 6:00 GMT JN  Machine Tool Orders (YoY)  MAY P  -80.40%  - -