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Talking Points
• Japanese Yen: Hold the 108.00 level as risk appetite returns
• Euro: GDP beat estimates but half of last quarter
• British Pound: Takes out 1.9700 and holds it
• US Dollar: US Trade Balance on tap
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Currencies put in a relatively tame performance in Asian and early European trade today with high yielders attracting flows as risk appetite returned to the market. As we noted yesterday, ”If equity markets remain positive… the high yielders amongst the majors should continue to rally against the greenback as carry flows continue.” That’ s been the dominant theme for the past 24 hours as DJIA rallied by 178 points followed by a 558 point advance in the Nikkei.
Risk appetite though somewhat diminished is certainly back, as traders reassess the dire, doomsday views regarding the global economy that prevailed only a week ago. If the combination of aggressive rate cutting by the Fed along with the stimulus package passed by Congress, manages to forestall the possibility of a US recession, investor’s spirits are likely to improve considerably and the high yielders in the currency market should continue to perform well.
Nowhere was this sunny scenario more evident tonight than in the Australian dollar, whose economy continues to surprise to the upside. The red hot economy Down Under produced 26.8K new jobs – significantly more than the 15K projected – suggesting that so far at least any slowdown in global demand has not impacted the resource rich Australia. Aussie once again rose above the 9000 figure with AUDJPY gaining more that 100 points on the day.
In EZ, the EURUSD too befitted from return of risk appetite with the pair breaking above the 1.4600 level while EURJPY traded 158.40 gaining more than 400 points this week. The rise in the euro however was restrained by the lackluster GDP data which printed at 0.4% in Q4. Although the news met consensus expectations, in absolute terms it marked a 50% decline from the growth levels in Q3 and indicated that growth in 2008 is likely to slow 1.7% from 2.3% in the year past. Given this deceleration analysts have suggested that ECB could begin preparing the market for possible easing as early as Q2 of 2008 and those concerns limited the gains in the unit.
In North American session, markets will get a look at US Trade Balance in December. Traders expect a decline to -61.1B from -63.1B. If the number meets and more importantly if it beats estimates by dropping below the psychologically critical -$60B level, equities and USDJPY should get a boost as the structural integrity of the US Balance sheet will finally begin to show signs of improvement.
The economic news however could prove fleeting, as attention will then turn to the testimony of Fed Chairman Ben Bernanke who will be appearing in front of Congress at 1500 GMT. Dr. Bernanke’s rhetoric will be parsed carefully for any clues to Fed’s monetary policy intentions. The market continues to price in expectations of another 50bp cut in March, but should the Chairman hint that the Fed may choose a more moderate path of 25bp easing, equities and along with them carry trades could take a swoon.
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