The FOMC statement provided the lead for early London hours, disappointment over the absence of an extension of the asset buying plan pushed down stocks and supported the USD in a reversal of the trends initiated in Asian hours.
USD strength, however, failed to extend below the EUR/USD 1.3930 level. AUD/USD also bounced after initial losses. Risk appetite had increased in Asian hours and regained a little traction as the London morning matured. The AUD had found support overnight on comments from PM Rudd that government efforts to stimulate the economy will lead to the creation of 210K jobs a year.
The improved outlook was cemented by Treasury Secretary Henry that Australian economic growth would be ''somewhat stronger'' in FY08-09 then the latest forecasts (the gov't forecasts stagnant growth in FY to June 09). The better outlook for the Australian economy is pivotal for the prospects of the 'risk trade' going forward. However, risk appetite in general will be tempered until confidence in a global economic outlook builds. In tune with the increase of risk appetite overnight the yen has fallen significant vs the EUR and USD, the softer tone supported by data showing Japanese investors were net buyers of foreign assets in the week of June 19.
The growth outlook in the Eurozone is likely to take a turn for the better following the ECB decision yesterday to lend a massive EUR442.2 bln in its first ever auction for one year loans. This huge dose of liquidity should help underpin the availability of credit within the region supporting growth prospects. By increasing the amount of cheap funding the ECB's action may also simultaneously have the effect of papering over some of the cracks in the banking system, for now. This week's PMI data from the region did show signs of stabilisation but generally disappointed the market consensus. This morning's Italian June business confidence did the same by rising to 69.3 from 68.8 in May, but failed to hit the 70.0 market median. Eurozone industrial orders data was weaker than expected at -1.0% m/m in April. In general, this week's data has been in tune with the perception that the Eurozone economic recovery is set to lag that of the US and is unlikely to show any growth until 2010. The ECB's action should support the growth outlook but the enormous addition of liquidity could weigh on the EUR.
Cable sunk lower in early London trading in line with the better tone of the USD.
Following a failed attempt to push higher from the 1.6330 level, cable is again testing the downside in a reversal of yesterday's gains. There have been no UK data releases this morning. Signs of a lack of communication between the BoE, the Treasury and the FSA implied by BoE Governor King yesterday are unsettling for sterling investors.
EUR/CHF is holding close to 1.5280, well above its pre-SNB intervention levels yesterday as the market reappraises the degree of aggression with which the SNB is enforcing its policy.
This afternoon, initial claims data will be closely watched. Final US Q1 GDP and PCE data are also due.
