| Daily Forex Fundamentals | Written by Saxo Bank | May 07 09 14:43 GMT | | |
| Australia's positive employment report shocker sees AUD extend rally. Positive spin on US bank stress tests fuels more risk appetite. MAJOR HEADLINES – PREVIOUS SESSION
THEMES TO WATCH – UPCOMING SESSION
Market Comment: The BoE announced plans to purchase another GBP 50 billion of assets - an extension of the GB 75 billion already announced and only 25 billion less than the 150 billion total that the Chancellor has authorized the BoE to print. This threw a bit of cold water on sterling's across the board strength as it had previously basked in the recovery of financial sector assets and much of the overall positive spin coming from the US bank stress tests. This and signs of "less terrible" UK numbers had the market speculating that the BOE might indicate it would not need to extend its asset purchase plans, but today's announcement was a small step from the most dovish scenario (extension of asset purchases by the full additional 75 billion) and the bank's rhetoric on the economy was very pessimistic. Inflation risks were judged minimal by the bank. The long GBP trade seems to have gotten a bit crowded of late, as evidenced in the violent reversal in EURGBP after attempting new lows. The key support for GBPUSD comes in at the 1.5000 level now. The ECB reduced rates 25 bps as widely expected to bring the rate to 1.00%. Mr. Trichet planned remarks outlined an extension of the term of its refinancing operations to 12 months and will extend the liberal collateral rules until the end of 2010. Critically, Mr. Trichet also indicated that the ECB would buy covered bonds, and said during the Q&A portion of the press conference that the technicalities of the bond buying would be outlined at the next meeting and that the amount of the purchases would be approximately EUR 60 billion (consider the small magnitude of this relative to the size of the EuroZone economy compared to GBP 150 billion for the 80%-ish smaller UK economy). When asked whether 1.00% would be the low point for rates, Mr. Trichet said it is not necessarily the lowest point, because it cannot control the trajectory of future conditions, but that it is the appropriate rate for now. So how does this performance from the ECB measure up to expectations in the market. Considering the background of risk willingness in recent weeks, this was a relatively dovish performance from the bank. But considering the expectations originating from the previous meeting, the ECB announcements were relatively inline and the size of the initial move in QE suggests a dipping of toes more than a dramatic plunge. Most importantly, EUR has been a terrible laggard for a couple of weeks or more now and the reaction seems to be more about sell the rumor, buy the fact on QE than anything else. Look at EURAUD for an example of this. Longer term, the driver for EUR will continue to be risk appetite and relative economic performance. The latter and fears of the QE reality have seen the EUR weaker in some of the crosses and on a broader basis until today, and the former will be what puts a halt to the EURUSD and EURJPY rallies. The JPY continues to fall into the abyss with all JPY-negative developments continuing to pressure the currency. Equities are storming ever higher, the bottom has fallen out of the bond market and oil is reaching to strong new highs not seen since last November. The Australian employment data was a shocker, with a drop of the unemployment rate by 0.3% rather than the expected +0.2% rise. This is one of the largest surprise gaps on this kind of figure in recent memory and certainly buttresses the AUD bullish argument, even if other Australian fundamentals don't jibe with this number and we would be very surprised if this number is the beginning of a new trend in the economy Down Under. Note that the weekly US initial claims data was lower than expected and the lowest since late January, a definite positive and lets hope that the coming weeks see further falls in this number as there is already a large additional rise in US unemployment built into the current trajectory and rate of claims. Watch the ICSC Chain Store Sales number later today for an indication on US consumption levels, with private consumption such an important input in the US economy. Also watch for the release of the Fed's US Bank Stress Test release, scheduled for 2100 this evening, GMT. This is a good spot to measure whether we will see a “sell the fact” kind of reaction to the release of the results, though so much has already been leaked and discussed at this point, it is a bit hard to see this as a dramatic event risk trigger. We should be on guard, however. In the end, the stress tests involve all kinds of projections for where the economy is going from here and assumptions about declines in asset values, etc… so the Fed’s projections would be rendered totally meaningless and wrong if the economy double dips and asset values continue to decline and defaults rise. The banks capital reserve levels are only as good as the Fed’s spreadsheets assume them to be . Considering how these kinds of assumptions and models got us all into this mess in the first place, we are as good as flying blind and should take absolutely no confidence away from the Fed’s conclusions. Chart: EURUSD EURUSD manages to overcome the ECB's shift to outright QE so far and may focus on the 200-day moving average around 1.3470. The outlook is clouded by the extent of recent back and forth and this structural resistance. It is difficult to get outright bullish unless we close above the recent highs and stay above there, and the bearish side is fraught with uncertainty until/unless the pair closes back below 1.3250. Again, a turn in equity indices to the downside seems also to be a pre-requisite for any EURUSD bearish outlook.
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Thursday, May 7, 2009
GBP Weakens on Extension of BoE Debt Monetization Plans. Market so far Shrugging off Modest ECB QE Plans as EUR Rallies.
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