From our friends at Saxo bank:
Market Comment:
Yesterday, the baseline scenario for the FOMC proved to be the correct one, i.e., the Fed came to the table with little new on offer, and even noted that it saw some positive signs of stabilization while clearly leaving all policy options open if the worsening gathers pace. The market’s reaction to a less dovish Fed than many might have feared was somewhat surprising, as the USD index plunged to a new three-week low rather than stabilizing (could this been an example of that pesky end of the month effect?). Also hurting the USD late yesterday overnight was the continued bullish action in equity markets, which seems to generally correlate with a weaker USD.
Nonetheless, the USD recovered sharply later in the European session and could follow through stronger still if other markets cooperate . The reversal today is compelling as long as the local lows for the USD here are not violated. The news out there in equity land is keeping risk appetite rather strong at the moment, though it appears from where we sit that much of the “good” earnings news has a lot to do with aggressive firings and other cost-cuttings rather than improving or expanding operations. The most shocking headline of the morning? European equity indices went into the black today for 2009. This market is getting way ahead of itself. Let’s see how Q2 pans out for corporate earnings, as the expectations bar has now been raised significantly. And how much can companies grow earnings when a larger and larger chunk of the consuming population in a consumption-driven economy is out of work or underemployed? Here we are a month into the new quarter and the initial jobless claims numbers are still rolling it at well above 600k in the US. At some point, a dose of cold water is going to hit risk appetite.
The RBNZ’s Bollard was out with a more dovish performance than the market was looking for. The 50-bp. rate cut 2.50% came as expected, but guidance was very dovish, with Bollard saying that the rate could move lower still and that rates could stay this low or lower until the latter part of 2010 and that gains in . This performance in light of all the bullishness abounding elsewhere saw kiwi flailing for support, especially against the stunningly robust AUD.
The question for everyone in FX land these days ought to be: do we believe in a bull equity market or not? The high beta trade remains the likes of commodity currencies vs. the USD and JPY as traders attempt to answer that question. We are medium term bears on risk – looking for the short term reversal that provides the signal to confirm the medium term view.
