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US$ Slips as Risk Assumption Resumes

The US$ slipped against most major currencies this morning, while paring recent losses against the JPY.  The dollar fell on easing risk aversion as global stock indexes moved into positive territory for the first time this week as fear of a widespread swine flu pandemic eases.  As global shares moved higher, focus has re-centered on the market’s growing risk appetite.  Despite continued economic weakness, both consumer and business confidence appear to be rebounding, which has weighed on the greenback as investors seek assets that are perceived as riskier, including equities, and European and commodity-based currencies.  However, a report this morning showed that the U.S. economy shrunk at a 6.1% annual rate in Q1, far worse than the expected –4.7%.  The dollar however has had little reaction to the number ahead of the U.S. market’s open.  Furthermore, preliminary results of the government’s stress tests have also shown that at least six of the 19 largest U.S. banks require additional capital, through conversion of preferred shares or by way of more taxpayer cash.  But with increased calls for oversight, further government support may come at the stiff price of more government controls including the firing of executives and board members.  However, despite the facts, consumer confidence, released yesterday, jumped by the most in nearly five years.  A monthly Fed meeting comes to a close later this afternoon, and interest rates are widely expected to remain near 0%.  Yet, with the Fed remaining the most proactive of all central banks, an announcement of further quantitative easing or other unorthodox measures to stimulate the economy could be announced.  In the short term, expect the dollar to remain in lower ranges against most major currencies as Wall St. is set to open higher this morning.

 

The EUR is higher this morning, boosted by regaining risk appetite.  The common currency had fallen earlier this week as investors feared the worst with Swine flu being reported in nations around the globe.  However, despite those fears, and continued economic weakness in the world’s largest economy, both consumer and business confidence remain on the rise.  A European Commission report showed that European business confidence rose to 67.2 versus an expected 65.2 in April.  However, this is not to say that the Euro Zone economy is on a straight up road to recovery.  This morning, German Chancellor, Angela Merkel, predicted a return to growth not until 2010 and only an annualized 0.5%.  A separate report showed that Ireland will in fact contract by the most of any developed economy since the 1930’s, and urged the government to nationalize the Irish banks to quell uncertainties.  In the short term however, expect the euro to remain towards the better end of its ranges as stocks shrug off disappointing economic news out of the U.S.

 

The JPY is slightly lower this morning as risk aversion wanes.  The yen had benefited over the past few days as fear of the swine flu drove investors to seek the perceived safety of the yen and the US$.  However, despite continued fear of a flu pandemic, and negative economic data out of the U.S., investor and business confidence continues to expand and has thus increased investor demand for assets perceived as riskier and higher-yielding.  In the short term, as stocks are set to open in the U.S. in positive territory, expect the yen to remain under pressure.

 

The GBP is higher this morning, shrugging off negative economic data out of the U.K. and benefiting from regaining market risk appetite.  This morning, Home Retail Group reported that profitability will likely decline this year as sterling’s weakness increases the cost of purchasing goods overseas, causing the company to raise prices.  Thus with both contracting domestic consumer demand, as well as rising costs, companies such as Home Retail, which imports some 80% of their products, will continue to weigh on the British economy throughout the year.  However, this morning sterling is on the rise as the EC released European business confidence at a higher reading than expected, thus boosting demand for higher-yielding, but riskier, assets, including British equities.  In the short term, expect the pound to remain towards the higher end of its ranges as global stock indexes move higher.

US$ Remains Supported as Swine Flu Fear Spreads

The US$ remains rather well supported in its role as a safe haven as global markets fall further as fear of the swine flu directs trade.  The particularly nasty strain of flu that originated in Mexico has now been reported in countries around the globe, and the World Health Organization admitted this morning that there is now “no way to contain it.”  With the WHO having raised the alert level for the virus, investors have had to re-evaluate how serious this contagion may be.  Even if the virus turns out to be less severe than now anticipated, the events of the past two days highlight the continued fragile nature of global markets and how any external shocks can prove detrimental to the system.  Continued concerns about the health of the U.S. banking sector have also prompted investors to flee riskier assets for the safety of the dollar and the yen.  It appears that both Citigroup and Bank of America have failed their “stress tests” as Federal regulators told both banking giants that they need to raise more capital.  Concern over what else the stress tests might reveal, combined with the fear of the damage of a flu pandemic, may hamper a nascent global economic recovery.  Further adding to the market’s heightened risk-averse sentiment, GM unveiled late yesterday their latest restructuring plans, which include the U.S. government holding a majority stake in the automaker.  While currency investors will take their cue from the direction of stocks this morning, note will be taken of the S&P CaseShiller Home Price Index, due at 9 am and expected to register 142.80.  Consumer Confidence, expected to read better than last month at 29.9, and Richmond Fed, expected at –17, are both due at 10 am.  In the short term however, expect the dollar to track the performance of global stock markets as investors seek the safety of the most liquid currency in the world.

 

The EUR is lower this morning on the continued wave of heightened risk aversion.  The outbreak of swine flu has caused global stock indexes to pare recent gains as investors fear the worst.  While seemingly unrelated to currencies, the swine flu episode has highlighted just how weak the global financial system remains.  Fear that such a flu outbreak could stunt economic growth further has caused investors to flee the euro as expectations that Europe’s largest economies shrunk by more than previously forecasted, weigh on the common currency.  A German newspaper is reporting this morning that the German economy, Europe’s largest, will in fact shrink in excess of 6% in 2009, far more than the initial reports closer to –1%.  In the short term, expect the euro to remain under pressure, albeit within its recent ranges.

 

The JPY is higher this morning, as investors’ fears over a spreading flu have sent them seeking a safe investment.  The yen continues to benefit in times of heightened risk aversion as the Japanese economy, despite its significant woes and issues of its own, is not as dependant on direct foreign funding due to its net-exporter status.  However, as stated, ultimately the Japanese economies exceedingly week performance will weigh on the yen.  In the short term however, as investors asses the potential affects of a global flu pandemic, expect the yen to remain supported against most major currencies.

 

The GBP is relatively flat this morning despite heightened risk aversion.  The British government held the first gilt sale since the U.K. Budget was released last week showing that the government deficit will balloon to unprecedented levels this year.  Investors bid 2.25 times the 3 billion pounds up for auction, compared with 1.36 times at the last sale of debt.  While there is a glut of government debt being issued, which has raised concerns about the U.K.’s ability to raise sufficient capital, the recent outbreak of swine flu, and the resulting risk aversion has caused investors to seek the safety of the BOE-covered investment.  In the short term, expect the pound to remain in its lower ranges, albeit with a negative bias in the mid to long term.

 

 

 

US$ Gains on Risk Aversion Due to Swine Flu

The US$ is higher against most major currencies, while slumping against the JPY as risk aversion drives trade this morning.  Global stock indexes moved lower overnight as nations around the globe declared a state of emergency over a quickly spreading outbreak of “swine virus”.  The disease is usually limited to those in contact with pigs, but it has since mutated to pass from human to human and has nearly brought the Mexican economy to a standstill.  The U.S., U.K., Canada, France, Mexico and New Zealand all have reported cases so far, with the worst, and only reported deaths, in Mexico.  While the disease does not directly affect currency markets obviously, the fear of a pandemic flu outbreak has drudged up worst-case-scenarios from several years ago when there was an outbreak of SARS, and then fear of an outbreak of Avian Flu.  The World Bank estimated that such a pandemic could cost upwards of nearly $3 trillion to contain and a drop of 5% in global GDP.  With the world economy already in such a precarious state, and after last week’s revised IMF report estimating a global GDP contraction for 2009, fear of any further shocks to the system has sent investors looking for relatively safe investments this morning.  This has bolstered the dollar against most currencies, and has moved it lower against the JPY.  Stocks are set to open significantly lower this morning, but it remains to be seen if the swine flu will amount to more than a far-reaching and particularly nasty strain of flu, or remain relatively contained to Mexico.  This morning, investors will take note of Dallas Fed Manufacturing Activity, due out at 10:30 and expected to show a modest improvement from last month at –46%.  Tuesday sees the release of S&P CaseSchiller Home Prices, Consumer Confidence, and Richmond Fed.  The middle of the week sees Q1 GDP, Personal Consumption data and a Fed policy meeting on Wednesday.  The week closes out with Personal Income, Weekly Jobless Claims, and Chicago PMI on Thursday, and U. of Michigan Confidence, Factory Orders, ISM and Vehicle Sales due on Friday.  In the short term however, expect the dollar to remain towards the better end of its ranges as Wall St. is expected to start the week in the red, thus bolstering the greenback in its default role as a safe haven instrument.

 

The EUR is lower this morning, as a recent flu outbreak has raised concerns that the current economic slump may be prolonged.  The common currency shrugged off positive commentary from ECB members, suggesting that the economic slowdown may be showing signs of slowing.  However, the recent outbreak of a global “swine flu” has investors fearing the worse, and remembering the World Bank’s estimates of significantly stunted growth should a flu turn into a global pandemic.  The euro has thus slid against both the US$ and the JPY as investors seek their perceived safety.  With economic data having little driving force on currencies this morning, expect the common currency to remain under pressure in the short term in a renewed wave of risk aversion.

 

The JPY is higher this morning as investors flock to its perceived “safe haven” status.  Global stock indexes are significantly lower this morning as fear of the economic implications of the “swine flu” boost demand for both the yen and the dollar.  With growing fear of a possibly flu pandemic, and slipping stocks, led lower by financial institutions, investors have been left with little choice but to by the yen on risk aversion.  The yen also benefited against the dollar as U.S. economic advisor, Larry Summers, stated that the U.S. economy will experience, “sharp declines in employment for quite some time this year.”  In the short term, expect the yen to remain supported as details emerge over the extent of the swine flu outbreak, and global stock indexes move lower. 

 

The GBP is weaker this morning, moving back towards the lower end of its ranges on a renewed wave of risk aversion.  Fear of the perceived impact of a global swine flu outbreak on the economy, has forced investors to buy the dollar and the yen on risk aversion.  The pound was also lower this morning on comments from former U.K. Treasury advisor, Roger Bootle, who said that Britain may be heading for a “1930s-type” depression as house prices slump.  A report showed that U.K. home prices dropped for a 19^th month in a row in April.  The pound is under renewed pressure following negative economic data out last week and increased expectations that the U.K. economy will deteriorate rapidly.  In the short term however, expect the pound to remain under pressure in a renewed wave of risk aversion caused by the swine flu outbreak. 

US$ Mixed Ahead of Government "Stress Tests"

The US$ is mixed this morning, slipping against both the EUR and the JPY, while gaining on the GBP.  The dollar’s overall direction continues to be driven by the assumption or aversion of risk as global stock markets consolidate in wide volatile ranges, economic data shows signs of bottoming, and investor confidence begins to recover.  The dollar’s role as a “safe haven” investment has thus waxed and waned on an hourly basis.  Media speculation and government denials or admissions also add fuel to the fire, as yesterday it was reported that Chrysler was preparing for bankruptcy, which was quickly refuted by the government stating that bankruptcy was only one of many viable options for the beleaguered automaker.  The dollar was sharply lower against the CAD this morning after the central bank of the U.S.’s northern neighbor opted to not enact quantitative easing measures, despite being widely expected.  The Canadian’s decision to not print money and buy up government debt seemingly gives the ECB options come their May meeting.  Canada, having already lowered interest rates to a historically low .5%, was expected to follow the example of the U.S, U.K., Switzerland and Japan, but instead stood by the fact that the central bank’s monetary policy efforts would be sufficient to stimulate the economy.  The US$ also remains on precarious footing this morning as the nation’s largest banks received the preliminary results of the Treasury’s “stress tests”.  The results were released to the 19 largest banks first, before going public, as many fear the tests will show the need for capital upwards of a further trillion dollars will make it hard for the institutions to assuage investor fear.  At 13 of the largest banks, bad assets increased by an average 169% from a year ago.  The test results will be released to the public on May 4^th.  In the meantime however, the dollar will remain in wide volatile ranges as traders gauge the market’s willingness to assume risk and the economic recovery prospects for the world’s largest economy.

 

The EUR is higher this morning, touching a three-week high against the dollar, as economic data out of the Euro Zone surprised to the upside.  German business confidence rose to 83.7 from 82.2 last month, sparking optimism that the regions recession may not be worsening.  The data also came after a separate report showed that French consumer spending was far higher than expectations.  This has generally led the euro higher because it may signal that the first half of 2009 was at least a bottom for the Euro Zone economy.  However, while possibly signaling a bottom, a recovery will likely be long.  Markets remain on relatively shaky ground as investors await the results of “stress tests” of the U.S.’s largest banks.  The euro also remains relegated to ranges as investors gauge the possibility that the ECB may enact quantitative easing measures at their May meeting.  However, after the central bank of Canada surprised the market yesterday and did not enact such measures, investors’ assumptions that the ECB must adopt unorthodox policies have clearly eased.  However, in the short term, expect the euro to remain range bound as the market swings between risk assumption and aversion.

 

The JPY is higher this morning, touching its best levels on the dollar in over a month.  The yen moved higher after Nikkei English News reported that authorities will limit the leverage on foreign exchange margin trading, reducing demand for the Japanese currency as a source for funding investments in the higher-yielding assets, the “carry trade”.  It was reported that margin would be limited to 20 to 30 times the principal rather than the 100 to 600 times which had been common place over the past several years.  The yen also moved higher as U.S. banks received the preliminary results from government “stress tests”, which many fear will signal that the world’s largest economy is still struggling with under performing assets, and faces another wave of bank write downs.  In the short term, thus expect the yen to remain supported as markets remain in volatile ranges.

 

The GBP is trading in wide ranges this morning as the balance of risk aversion versus assumption provides momentum to sterling’s wide swings.  The pound was under initial pressure as Moody’s Investor Services suggested that Britain’s AAA rating was under question as their finances have quickly deteriorated.  A separate government report also showed that the British economy contracted some 1.9% in the first quarter, after declining 1.6% in the final quarter of 2008.  The drop was the largest since Margaret Thatcher became prime minister back in 1979.  England’s balance sheet is deteriorating rapidly, due to a combination of weakening tax revenues and the accumulation of sizeable assets and liabilities after successive bank bailouts.  The pound has however reversed its drop against the dollar as gaining global investor confidence boosts demand for higher-yielding and riskier assets.  In the short term, expect the pound to remain in wide ranges as investors gauge the overall health of the U.K. economy. 

US$ Consolidates as Risk Aversion Abates

The US$ slipped against both the EUR and GBP this morning, while gaining on the JPY as risk sentiment stabilizes.  Global stock indexes pushed into positive territory, despite Wall St.’s disappointing close yesterday afternoon.  With stocks moving north, investors appetite for riskier assets has benefited the currencies perceived as “higher-risk”, at the expense of the dollar’s recent strength.  Positive economic data out of Europe supported the assumption of risk, as yesterday’s awful data and morose outlook from the IMF seem to be easily forgotten.  However, the dollar’s decline will likely be capped by the upcoming results of the bank “stress tests” and growing expectations that the fiscal deterioration of the world’s largest economies will likely continue deep into the year and a recovery will be unlikely seen until 2010.  In other North American news, the Canadian central bank is widely anticipated to announce its first “quantitative easing” measures as another major G7 economy enacts the more unorthodox policies.  The loonie has thus been rather well supported this morning as investors reward currencies of countries that are proactive.  This morning saw the release of Weekly Jobless Claims registered 640K, and while an awful number at best, it was inline with expectations, but continuing claims continued on to set a fresh high.  With no other economic data slated for release today, the dollar will likely continue to track equity markets.  Wall St. is set to open higher this morning, paring much of yesterday’s losses as the Dow Jones Industrial Average consolidates around the 8000 level.  With higher stocks and higher commodity prices, as oil rebounds from its recent drop, expect the dollar to remain towards the lower end of its recent ranges.

 

The EUR is back towards the better end of its ranges this morning as better-than-expected economic data suggested that the economy may be showing signs of bottoming.  Euro Zone PMI, both manufacturing and services, registered higher than expected, although still far below 50 (the distinction between expansion and contraction).  The numbers were the best in six months, and new industrial orders declined by less than forecasted.  While the numbers may be signs of better things to come for the collective economy, growth does remain negative and the ECB is still widely expected to cut interest rates at their next meeting.  Growing discord amongst voting members will also likely keep the common currency capped as investors look to hold other currencies.  In the short term however, expect the euro’s inverse correlation with the stock market to remain largely intact, albeit relegated to relatively tight ranges against the dollar.

 

The JPY is lower this morning as risk assumption again steers trade.  The yen had seen significant strength over the past week as stocks stumbled, but with an apparent recovery on Wall St. and with better-than-expected economic data, investors have again moved to assume riskier assets than the JPY.  The yen was also stung as Japan’s three biggest automakers, Toyota, Honda and Nissan all lowered production last month as sales continue to plummet in the U.S., Japan and Europe.  Toyota declined for the eighth straight month, sliding some 50% to only 400K vehicles built in March.  The Japanese companies are shifting their marketing focus away from the traditional American, German and Japanese markets, towards the still relatively robust Chinese market, which is expected to expand far faster in the next year despite incentives in Europe and Japan.  For the yen however, expect it to remain within its relatively high ranges in the near to medium term as risk assumption versus aversion continues to drive trade.

 

The GBP is slightly higher against the dollar this morning as risk aversion abates.  However, the pound has limited upside potential in the near term after yesterday’s atrocious economic data suggesting the British recession is in fact deepening.  The U.K. government also announced yesterday it plan to fund its budget deficit by selling a further 300 billion pounds in government debt.  After a failed auction of debt earlier this month, fully subscribed auctions are clearly not assured.  The pound has however has been rather well supported overnight, following yesterday’s precipitous drop early on in U.S. trading, as investors’ willingness to assume riskier assets, including the pound, pushes it higher.  In the short term however, expect the pound to consolidate in its lower ranges as investors gauge the future health of the British economy. 

US$ Mixed as Lower Global Growth Forecasts Spur on Risk Aversion

The US$ is mixed this morning, gaining significantly on the GBP, falling against the JPY and maintaining its levels against the EUR.  The struggle of risk aversion versus assumption continues to direct trade as U.S. equity markets battled out of the red yesterday afternoon on reassuring testimony from Treasury Secretary Geithner, suggesting that most major banks have sufficient liquidity.  This morning however, the pessimists seem to be winning following a report from the IMF forecasting total global write downs to top $4.1 trillion, and GDP to fall 1.3% this year a far more dire outlook than previously predicted.  The IMF’s suggested solution is more cash injections direct from the government.  The report estimated that the U.S. would need about $275 billion; the euro area, $375 billion; the U.K., $125 billion; and about $100 billion for other developed economies by the end of 2010.  The dollar has also seen significant strength against commodity-based currencies as global stocks did not follow Wall St.’s lead in moving higher and commodity prices fell.  With the global recession clearly not over, even if moderating, the dollar’s role as a “risk aversion” investment will keep the greenback relatively well supported.  This morning sees the release of the Home Price Index, expected to show a decline of 0.7%, due out at 10am.  Wall St. is set to open lower this morning after Morgan Stanley, the fifth-largest U.S. bank, reported a bigger-than-estimated loss after real estate and debt-related write downs overwhelmed trading gains.  The first-quarter loss was 57 cents a share, versus the expected 8 cents a share.  However, with little data due for release, the direction of the currency market will likely track that of the stock market, with the dollar benefiting from high volatility. 

 

The EUR is relatively unchanged this morning, despite trading through a volatile Asian and European session.  The common currency has fallen to a six-week low as of late on renewed risk aversion as well as heightened suspicion that discord amongst ECB members may render the bank ineffective going forward as monetary policy looses its potency.  Investors were also on edge over the Euro Zone following a report suggesting that the German economy, the Euro Zone’s largest, will shrink by six percent, the worst since the WWII.  The German government will run a budget deficit of 3.7% of GDP this year and 5.5% of GDP next year as the recession cuts tax revenues.  With risk aversion again influencing currency markets, and with little positive news or data out of the Euro Zone, expect the euro to remain under pressure in the near term.

 

The JPY is higher this morning, benefiting from a renewal of risk aversion.  Despite economic data suggesting the pace of economic decline may be easing, more medium and long-term forecasts have been continually revised lower as the global economy will likely slip into recession before the end of the year.  Despite having their own economic troubles, Japan’s economy remains relatively sheltered from the credit crunch, and the world’s second most-liquid currency, the yen, thus benefits as investors seek a safe investment.  With Wall St. expected to open lower, expect the yen to remain towards the higher end of its ranges.

 

The GBP suffered a significant drop this morning, falling off after awful economic data.  It was reported this morning that the U.K. budget deficit nearly tripled to 90 billion pounds in the fiscal year through March, and is expected to reach 11% of GDP this year, the highest since WWII.  Jobless claims in the U.K. also reached a decade high, toppin 1.5 million in total, the most since PM Gordon Brown’s Labour party took control of parliament in 1997.  Following the reports, Chancellor of the Exchequer Darling revealed the government budget, saying the government will borrow a further 269 billion pounds, as the recession saps tax revenues.  The Treasury’s deficit will total 703 billion pounds during five fiscal year through April 2014, compared with the 434 billion pounds forecasted back in November.  This year’s shortfall is the largest amongst all G20 nations.  To counter the steep deficit, Darling announced a tax increase on Britons earning more than 150K pounds a year to 50%, and fuel and alcohol & tobacco taxes will rise fast than inflation for the next five years.  Investors have thus sold the pound this morning as it is clear the U.K. economy is in dire condition and the government will likely expand its long-term debt purchases and in fact support a weaker currency to boost the competitiveness of their exports.  In the short term, expect the pound to remain in wide, volatile ranges as investors gauge the economic prospects for the island nation. 

US$ Consolidates as Stocks Set to Continue Slide

The US$ consolidated in its new ranges overnight against most major currencies as investors balance risk with expectations for economic growth.  The dollar remained strong as investors sold equities yesterday after Bank of America, despite beating the street in terms of quarterly profits, reported a jump in non-performing assets, highlighting the banking sector’s continued woes.  This, along with a renewed wave of monetary policy easing from global central banks, has pushed the dollar to its best levels in over a month against most currencies, as investors seek the relative safety of the world’s most liquid currency.  Overnight, Sweden’s Riskbank cut interest rates to 0.5%, the lowest levels ever, and suggested that future cuts may still be possible and that unorthodox measures could be enacted should the Swedish economy continue to worsen.  The Bank of Canada meets later today, and while a cut in interest rates is unlikely, with the key rate already at an ultra-low 0.5%, methods of “quantitative easing” will likely be announced.  While it appears the correlation between stock indexes and the dollar may be reemerging, it is more likely a correlation with market volatility.  So despite improved economic data, better-than-expected corporate earnings, and surprisingly robust banking sector profits, investors remain apprehensive to assume risk, and the dollar has thus benefited.  Today sees no major economic data released, and thus the dollar will likely remain within its ranges, albeit with an overarching positive trend as stocks are currently expected to continue their slide after yesterday’s three-digit sell off. 

 

The EUR initially gained this morning on better-than-expected economic data, but has since pared its gains, as investors remain uncomfortable holding euro positions.  The ZEW Institutes economic confidence survey registered an increase to 13 from –3.5 last month.  This was the first positive reading was positive since July ’07, and beat forecasts of 1.5.  This is good news for the Euro Zone economy.  As the deterioration of the real economy begins to slow, it appears confidence indicators may have found a bottom.  However, investors do remain apprehensive that the ECB will be effective in their policy decisions in the near term.  The Bank has made it clear that quantitative easing will be discussed at their May meeting, but discord is obvious amongst the Bank’s members as the Germans and Austrians refuse to lower rates further, while members from the likes of Ireland, Greece, Cyprus and Spain urge the Bank to follow the lead of their G7 counterparts and move rates closer to 0%.  A separate report this morning also showed that Producer Prices fell for the first time in five years, leaving room for the Bank to lower rates further.  In the short term however, expect the euro to remain range bound, albeit with a negative bias. 

 

The JPY consolidated in its new higher ranges overnight as slumping global stock indexes and increased volatility prompted traders to seek safe haven investments.  Despite all of Japan’s economic woes, being the world’s largest net-exporter, they remain relatively secluded from the global banking-sector woes and thus depend less on foreign nations for funding.  That said, the nation’s economic weakness will likely cap any significant yen gains, but in the near term the currency will benefit from falling commodity prices and thus commodity currencies.  The AUD and NZD have been amongst the worst performing of the sixteen most-actively traded currencies as the specter of deflation weighs heavily.  In the short term, expect the yen to remain relatively well supported as stocks will likely continue yesterday’s slide and market volatility remains high.

 

The GBP consolidated overnight after suffering a steep decline on Monday.  This morning, Chancellor of the Exchequer, Alistair Darling, announced he will introduced guarantees for mortgaged-backed bonds, allowing buyers to sell the securities at no loss, in an effort to wean banks off government aid.  The Treasury will offer guarantees for 50 billion pounds of bonds, hoping that by backing bonds, banks, which are now dependent on state funding, will write loans.  The asset-backed securities market, which has all but dried up over the past six months, used to fund nearly a third of the British mortgage market before the credit squeeze began in 2007.  The pound initially weakened on the announcement because many speculate the plan will not work because the underlying value of the assets still remains unclear.  However, the currency has since pared its losses, but will likely remain bound to ranges as stocks are set to continue yesterday’s slide. 

US$ Gains as Stocks Slide...Again

The US$ is firm this morning, gaining against most major currencies, while falling against the JPY.  A slight reemergence of risk aversion, or at least a slowing in risk assumption, has bolstered the greenback as investor optimism in the U.S. as the economy most likely to emerge first from the global recession provides support.  So far for corporate earnings season, 64% of S&P 500 companies have surprised to the upside, beating out expectations showing that the government and Fed’s efforts to boost economic activity have been somewhat successful.  However, an analysis by the Wall St. Journal did show this morning that new lending and/or refinancing originating from the largest benefactors of the governments TARP fund, has fallen 23% since October, when TARP was first introduced.  A weak start to the week in global equities has also seen the dollar move higher as European financials’ stocks under perform.  The results from the “stress tests” that the U.S. Treasury has performed on the major U.S. banks are set for release on May 4^th, and many fear that the tests have either been insufficient or, even worse, will show that the banking sector is weaker than expected.  The schedule for data releases this week is rather barren, with only Leading Indicators due out this morning at 10AM and expected to register a modest increase to –0.2%.  Tuesday is without data, and Wednesday sees the House Price Index.  The week closes out with Weekly Jobless Claims and Existing Home Sales on Thursday, and Durable Goods and New Home Sales on Friday.  With little economic data providing direction to the foreign currency markets, the dollar will likely be directed by investor perception of both U.S. economic performance and central bank actions moving forward. 

 

The EUR moved to a month-and-a-half low this morning against the US$, weighed down by contradictory central banker sentiment in the ECB.  The ECB is comprised of 16 very different economies, with different traditions and clearly different ideas of how the ECB should approach the problem.  ECB President Trichet has pigeonholed the Bank by stating untraditional forms of “quantitative easing” will be discussed at the May 7^th meeting, but the voting members clearly have conflicting views, with those members from nations such as Germany not supporting such actions and members of more periphery nations calling for significantly lower interest rates and nontraditional measures.  In these still rather dire economic times, the appearance of discord and lack of a focused direction ion policy is particularly damaging to sentiment, and investors have thus made the euro pay.  In the short term, with global stocks moving lower and slipping confidence in the ECB’s effectiveness, expect the common currency to remain under pressure.

 

The JPY is slightly higher this morning in a modest reemergence of risk aversion.  The yen has strengthened since European equity markets opened in negative territory this morning, and has strengthened since.  However, the economic situation in Japan remains dire as an index of leading indicators fell to 75, and still has not shown an signs of a bottom forming as it touches a new all-time low.  The yen also saw a boost as commodity currencies were sharply lower.  The AUD was the worst performer of the sixteen most actively traded currencies overnight as Aussie PPI declined by 0.4%, versus an expected gain of 0.6%, suggesting that Australia might experience deflation sooner rather than later.  The drop also provides the Reserve Bank of Australia sufficient room to lower interest rates further, eroding its marginal yield advantage.  In the short term, do expect the yen to remain supported, albeit capped within its recent ranges.

 

The GBP is significantly lower this morning, the second worst performer against the dollar, dropping a percent and a half.  The selling comes ahead of a busy week in British economic data, with RPI, CPI, employment, BOE minutes, and Q1 GDP all set to be released.  The government’s budget statement will also be out on Wednesday, which will include a provision for losses on the government’s support of the banking sector, expected to be reported as high as 60 billion pounds.  The news appears to be outweighing some positive news from UK Rightmove House Price data that showed the average asking price for a home saw a near two percent increase in April as mortgage availability improved.  This is third consecutive monthly increase, and the highest monthly increase since February of 2007, adding to the growing consensus that a bottom may be forming in the British housing market.  However, in the short term, expect the pound to under perform, bogged down by lower equity markets and investor expectations.

US$ Gains as Investor Confidence Builds and Schisms Show in the ECB

The US$ is stronger this morning against most major currencies as confidence in the U.S. economy continues to build.  The greenback was bolstered by central banker commentary overnight, as it appears support for a stronger dollar is universal.  Overnight, members from the ECB, BOE and Swiss National Bank all echoed these sentiments in separate speaking engagements.  With that said, Fed policy maker, Fischer, was also quoted as saying, “that the Euro Zone faces far more difficult challenges than the U.S.”  Investor confidence appears to be on the rise as well.  The VIX index, volatility index, often referred to as Wall Street’s “fear gauge”, fell to 34.88 yesterday, the lowest level since Sept. 26.  To further support the growing confidence, beleaguered banking giant, Citigroup, as well as mega-corporation, GE, reported better-than-expected profits for Q1, continuing the recent trend to surprise on the upside.  With the dollar moving to its best levels since March 18^th, before the Fed enacted the recent quantitative easing policies, expect the greenback to remain towards the better end of its ranges.  While the dollar has weakened when stocks rise over the past several months, the trend appears to be decoupling with expectations of longer-term growth beginning to have a larger influence.  In tune with theme of consumer confidence, investors will take not of U. of Michigan Confidence data due out at 10, and expected to register 58.5 versus 57.3.  In the short term, should the Michigan data read in line with expectations or better, expect the dollar to remain supported against most currencies, but against the European currencies in particular as traders favor the economy that will recover the fastest.

 

The EUR fell to its lowest levels in a month overnight.  ECB President Trichet failed to assuage fears that there is serious divide amongst the ECB policy makers after conflicting statements over the past two weeks.  ECB member Axel Weber has made it clear that he believes the ECB should not, and cannot, lower interest rates below the 1% mark.  Whereas the ECB members from Greece and Cyprus have both made it clear that they think rates should drop closer to 0% and the Bank should buy government and corporate debt as their G7 counterparts have.  Trichet stated, “Any ambiguity in our medium-term policy direction would delay the return of sustainable prosperity, because that would undermine confidence, which is the most precious ingredient in the present circumstances.”  Ireland’s AAA Moody’s rating is also under review and is widely expected to be moved lower, further adding fuel to the fire that schisms in the Euro Zone may prove detrimental sooner rather than later.  Traders have thus sold the common currency in favor of the US$ as ambiguity does obviously exist and the continued perception that the ECB has been too slow to act will weigh on the common currency in the medium to long term.

 

The JPY is relatively flat this morning against the dollar, but is lower against European and higher-yielding currencies.  Morose comments from the Japanese government led the currency lower in most pairs.  The Cabinet Office stated in report this morning that, “the economy is worsening rapidly while in a severe situation.”  The Office also lowered its evaluation for business sentiment in the world’s second largest economy since December with Japan headed for its worst postwar recession, as a global slump in consumption has weighed heavily on Japanese exports.  The Director of Economic Analysis at the Cabinet Office stated, “We’re seeing an ongoing deterioration in the corporate sector, which is spreading to households.”  In the near term, expect the yen to remain in relatively tight ranges against the dollar, while moving lower against most other currencies.

 

The GBP is a bit lower this morning on generally improved confidence in the US$ and negative comments from the British government.  The U.K. Trade Minister commented that he did not oppose a weaker pound, as it would make British exports more competitive and help move the economy out of recession.  With direct commentary on the state of foreign currency markets, investors bought the US$ in favor of the pound. The pound also slipped as better investor confidence has broadly supported the US$ against the sixteen most actively traded currencies.  With possible direct government support for a weaker pound, expect the British currency to remain under pressure in the near-term. 

US$ Consolidates as Stocks Move Cautiously Higher

The US$ is moderately better against both the EUR and GBP, while slipping against the JPY.  While Fed Chairman, Ben Bernanke’s, sentiment that the “worst is behind us” has been echoed by fellow G7 central bankers, this does not however mean that a recovery will come quickly.  After disappointing retail sales data out earlier this week, and both consumer prices and producer prices showing modest deflationary pressure, the question has become what “shape,” and how long, the recovery will take.  This has however had a muted effect on the US$ as trade remains directed by risk assumption versus aversion.  Against the euro, an assumption of risk has not had much of a negative affect as economic activity in the Euro Zone remains weak and most believe that the Euro Zone’s recovery will lag that of the U.S.  Conversely, against the GBP, the dollar has weakened considerably from its best just over a month ago as investors look to buy higher-yielding assets and equities priced in British pounds.  This morning, investors took note of Housing Starts, which were slightly worse than expected, reading 510K versus an expected 540K, and weekly jobless claims were better than forecasted at 610K versus an expected drop of 660K.  However continuing claims did continue to rise, breaching the 6M level for the first time.  Investors will also take note of Philly Fed data out this morning at 10pm, expected to show a modest recovery from last month at –32.0.  This morning’s data has had little noticeable affect on foreign currency markets, and direction will likely be determined by investor’s willingness to assume riskier positions. 

 

The EUR is a bit lower against the US$ this morning as investors remain wary over the prospects of an imminent economic recovery in the Euro Zone.  With the ECB “dragging its feet” in terms of qualitative easing, it shows that there are divisions within the central bank and even the mechanics of buying government treasury bonds remains in question.  In light of this uncertainty, investors remain apprehensive to buy the euro.  Yesterday, ECB member, Axel Weber, was quoted as suggesting the Bank’s target lending rate should not fall below 1%, clearly at odds with other policy makers’ comments that the rate should move to near 0% in the near future.  A report also showed industrial production in the Euro Zone tumbled 18.4%, the biggest decline since at least 1986, and worse than expected.  While generally sentiment has improved around the globe about “the bottom” for the economy, initiatives from the U.S, British, Swiss and Japanese central banks will likely not be enough to bolster the Euro Zone economy by association.  In the short term however, expect the euro to remain in relatively tight ranges as risk assumption versus aversion determines the direction of trade.

 

The JPY is slightly higher this morning as investors were wary that an economic recovery is imminent.  Overnight, China reported that its economy expanded at the slowest pace in almost a decade in the first quarter as global demand for China’s exports dried up.  However, investor sentiment has begun to improve as a recovery in equity markets encourage investors, and this has thus led emerging market Asian currencies higher.  By association, Japan’s currency has also seen a lift this morning, as investors in the world’s second largest economy assume riskier positions.  In the short term however, expect the yen to remain in relatively tight ranges, directed by the overall market appetite for risk assumption.

 

The GBP is relatively flat this morning paring some initial gains on evidence that the housing slump in the U.K. may be easing.  The pound’s recent gains were also capped as futures for Wall St.’s opening fluctuate between positive and negative and while the housing market may be bottoming, prices still declined by over 12%.  The pound tends to gain when market sentiment is positive, as investors are encouraged to buy higher yielding, but riskier, assets priced in British pounds.  In the short term, expect foreign currency markets to remain directed by equity markets and investors’ willingness to assume riskier assets.