The Euro, Sterling, Aussie, Kiwi and Cad all managed to post some marginal gains, while the Franc traded flat and the Yen sold off a bit. Technically, all seemed to be quite normal, but fundamentally, some traders were left scratching their heads after the latest round of US data produced results that would have normally forced a much greater deal of volatility and panic reaction than we had seen. Given the way things had been going over the past several days since the latest escalation in risk aversion, it was quite surprising to see a North American close which resulted in higher equities and currencies following a disastrous round of durable goods and new home sales which were the worst on record.
Technically, the picture has not changed, and despite the latest market moves back into risk, we believe this reaction will only be short-lived, with the greater risk for a resumption of US equity selling and USD buying on fears of a double dip global recession. Perhaps risk takers were looking for an opportunity to buy into dips with the equity markets pulling back to attractive intraday levels, but we would attribute the latest round of risk buying to the expectation that US officials will now look to implement yet another wave of accommodative policies to help alleviate any strains felt from the slowing economy.
In our opinion this is a backwards and misguided way of looking at the overall picture, with bulls seeing opportunity because investor hands will be held even tighter during these trying times. Instead, we are concerned that the severity of this latest economic crisis is not being taken as seriously as it should be, and today’s data is a clear reflection of this fact. As such, we believe that cooler heads will ultimately prevail, and the risks from here are for renewed equity selling and a resumption of broad based USD buying even against the Yen and Swissie. Despite their recent appeal, both the Yen and Swissie are highly overbought and officials in Japan and Switzerland are growing increasingly concerned with the negative impact of the stronger currencies on their local economies.
Looking ahead, the Swiss employment level (0.5% expected) is due at 7:15GMT, followed by Eurozone M3 (0.2% expected) at 8:00GMT and UK CBI reported sales at 10:00GMT. Data overall is quite light in European trade, so we expect the markets to trade off of broader global macro developments and themes.
Written by Joel Kruger
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