Risk was back in favour this morning. Enthusiasm was drawn from the better tone in stocks which in turn came from the reassurances from the G20 Finance Ministers that they will continue with policies aimed at supporting the global economy. In tandem with the rise in stocks, oil prices were again on the increase and, in the fx market, all the usual suspects including the GBP and the EUR moved higher vs the USD. The moves in the CAD, the NZD and the AUD were particularly noteworthy.
USD/CAD plunged through the 1.0840 area this morning on last week's better than expected Canadian employment data and today's gains in oil. AUD/USD has returned to levels not seen since September 2008 with the latest bout of buying following a 4.1% increase in job advertisement; the first rise in 16 months. The data has increased speculation that the RBA may tighten policy before the end of the year even though last week's policy statement which referred to policy as being appropriate dampened speculation for a rate hike as soon as next month. While the NZ economy is still seen to be lagging that of Australia, the NZD received a boost overnight from comments from PM Key who commented that the economy may be moving into a growth phase and could register growth in Q3 (Australia grew by a stunning +0.6% q/q in Q2).
While sterling managed some gains vs the weaker USD and JPY, it failed to make any progress vs the EUR. News that the British Chamber of Commerce now sees 2009 growth falling by a sharper than previously forecast 4.3% underpins the prospect that the UK recovery is lagging that of Germany, France and the US. The Bank of England policy meeting on Thursday will be the biggest event of the week for the sterling markets. However, with the Bank likely to reinforce its cautious outlook EUR/GBP may continue to find is difficult to break below the 0.8700 support. That said, the negative perception of the UK economy at present suggests the pound may see buyers emerge on better than expected housing or production data this week.
EUR/USD has crept higher in tune with the climb in risk appetite. However, the tone remains consolidative. Weekend news brought calls from China for the US to control its budget deficit in any effort to stave off a softer USD further out. These calls are not new by will ensure that the issue of fiscal discipline remains in the limelight. On that note, the US Treasury is due to auction $70 bln worth of paper. In general strong demand has been registered so far this year. It will be interesting to see if the improvement in risk appetite negatively effects demand for fixed income assets. Given the US huge financing need, poor demand would undermine the USD. That said, China this weekend made clear the difficulties associated with diversifying away from USD dominated fx reserves suggesting that the US Treasury paper will continue to see good foreign interest. The US Labour Day holiday today will ensure a quiet afternoon session.
