The Yen has started the week off stronger against the dollar by approximately 100 pips to 97.50 while the rally in equities fades as the Dow and S&P fall more than one percent. Investors have grown concerned that the rally witnessed may be overextended given the valuation of poor earnings expected in 2009. Since hitting intra-day lows on March 6, the Dow30 index has rallied more than 30% while the S&P500 has seen a gain of more than 35% in the same period to pare year-to-date losses. Strength in recent months was largely the result of better-than-expected first quarter results in financials and optimism that demand would rise from global stimulus packages. Commodities have rallied significantly off their bottoms with Crude climbing over $58 per barrel off a low just above $30.
In the past week, the US stress tests showed ten firms are required to raise capital within six months and are already taking swift action in response. Morgan Stanley recently raised $8B in stock and bond sales while Wells Fargo raised $8.5B. Other firms, including Bank of America, BB&T, Capital One, and Keycorp, are also planning to follow suit following the success of other banks’ offerings. Also raising optimism were signs the world’s largest economy may be bottoming as non-farm payrolls declined less than expected in April at 539,000 versus a Bloomberg consensus estimate for 600,000 jobs lost. Looking ahead this week, upside in US retail sales and a jobless claims under 600K may show further improvements while poor readings from German and Euro-Zone GDP may lead to strength in the battered-down US dollar. The euro has strengthened significantly on risk appetite and recently crossed above it’s 200-day moving average against the dollar. Along with a fade in the equity rally, the euro may top out soon and resume a downtrend.
Since the start of the year, dollaryen has often shifted before equity markets have moved. The yen hovered at approximately 90 yen to the dollar as the Dow30 fell while reversing course prior to the March 6th intra-day lows in US markets. Follow a peak of above 101 in early April, the yen has begun to move lower signalling that equities may follow suit. Analysts remain divided on the pair with technicals pointing lower while fundamental analysis shows no clear direction for the currency.
[B]USD/JPY and Dow30 Index Year-to-Date[/B]
