Euro Soars, Dollar Falters as Record Chinese Demand Spurs Risk Appetite

Talking Points

•    Japanese Yen: Weighed by Risk Appetite
•    Pound: Support Found From Broader Trends
•    Euro: Trichet Cautions On Inflation
•    US Dollar: Sunk As Risk Trade Continues

Euro Soars, Dollar Falters as Record Chinese Demand Spurs Risk Appetite

The Euro soared over 200 pips to a three week high of 1.4545 on the back of risk appetite spurred stronger than expected French industrial production and record demand from China. The Asian giant reported a 55.9% increase in imports and overtook the U.S. as the world’s largest auto market. Meanwhile, French industrial production rose for the third time in the last five months by 1.1%, surpassing estimates of 0.5%.

German automakers saw support on the prospect that the China’s growing domestic economy will be a source of demand for the foreseeable future. Europe’s largest economy has seen growth for the past two quarters which is expected to continue as the global economy recovers. Indeed, President Trichet in an interview in Switzerland stated that the European economy is in “recovery mode” and that anchoring of inflation expectations is essential. The somewhat hawkish comments could raise the outlook for European interest rates and provide further support for the single currency.

The British Pound also saw support on the increase in risk appetite gaining over 100 pips in overnight trading. Absent fundamental data sterling support continues to be generated bu the broader trend. However, comments from former MPC member Willem Buiter that the BoE may raise rates before the ECB could start to raise interest rate expectations. Citigroup’s chief economist sees the potential for the for tightening to begin in the middle of 2010 with rates rising to 1% by the end of the year.

The dollar took it on the chin overnight as it returned to its negative risk correlation. Last week’s dour jobs report (-85,000) has pushed back the horizon for a rate hike by the Fed. The prior month’s strong results had led market participants to speculate that job growth was around the corner which in turn would spur inflation forcing the central bank to begin tightening. An empty economic calendar today provides no event risk and if US equity markets follow their Asian and European counterparts higher, then look for continued greenback weakness. 

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