Daily Market Outlook

 

   U.S. dollar rises on Wednesday on lowered risk appetite

The greenback strengthened against most of the major currencies on Wednesday as investors continued to buy the safe-haven U.S. dollar due to persistent worries over the economic recession. In late New York afternoon session, the ICE futures dollar index eased from intra-day high of 85.343 and was last trading up 0.11 percent to 84.888. The dollar rose to session highs of 99.68 and 1.1488 versus the yen and swiss franc respectively in earlier session before profit-taking occurred.  

  
The euro came under pressure after ECB Governing Council member Axel Weber said the central bank will announce a package of ‘non-standard measures’ to boost the eurozone economy in May. The single currency fell to as low as 1.3146, 0.8787 and 129.91 against the dollar, sterling and yen respectively before stabilising.  
  
Meanwhile, the British pound rallied above 1.5000 against the dollar and touched a multi-month high of 1.5038 as Royal Institution of Chartered Surveyors showed that the slump in U.K. house prices eased last month after more than a year of declines lured buyers back into the market. The number of real-estate agents and surveyors saying prices fell was 73.1 percentage in March, compared with 78.1 in February (the highest figure in 13 months).   
  
On the data front, German wholesale prices dropped the most in more than 22 years in March after energy costs and prices for agricultural goods plunged, falling 8 percent from a year earlier after a 5.7 percent decline in February. Other reports from U.S. showed that manufacturing in the New York region contracted by the least since September, posting a -14.7 reading compared with -38.23 in March while industrial production in the U.S. fell 1.5 percent in March (14th time in the last 15 months) as factories trimmed unwanted stockpiles.  
  
Economic data releases on Thursday include U.K. BRC retail sales, Japan machine tools orders, Switzerland’s PPI data, eurozone HICP final, industrial orders, and U.S. building permits, housing starts, weekly jobless claims and Philadelphia Fed survey.

Financial And Capital Markets

The Financial And Capital Markets

Capital markets have maintained their broad recovery; but price action seems to be outpacing sentiment. US equities have recovered nearly 20 percent since hitting their decade lows over a month and a half ago; physical commodities have reversed course after months of basing; and risk premiums in debt and derivative markets have shrank. However, despite these improvements, positive growth is still a distant hope and financial uncertainties still very real threats. Policy officials, economists and traders unanimously forecast an eventual recovery in global expansion sometime either later this year or through the first half of 2010. However, whereas politicians and academics can afford to have a long-term outlook, market participants cannot. An ongoing recession dampens rates of return, stifles capital investment and puts the breaks on production. Altogether, the economic hardship is the fuel for a bear market – so how stable is this ‘market recovery?’

 

A Closer Look At Market Conditions

Over the past week, capital markets struggled to keep the momentum behind the developing rebound from late February lows. The Dow has struggled to keep its pace following its push through 8,000 as last week’s drop in liquidity preceded the start of earnings’ season. With most economic parties forecasting a sharper pace of contraction through the first quarter (not much of a stretch considering the horrible monthly data that has crossed the wires), investors are looking for see how revenues fared. This could act as justification or a contradiction to the fragile rebound in investor optimism. Commodities have responded with greater caution with demand wholly in flux.

In gauging the health of the markets, we have to balance the health of risk and return. For a genuine recovery to develop, investors need to see real evidence for a returns to grow and encourage competition amongst investment classes; and they have to be able to comfortably assume there are no major threats to the normal functioning of the markets. In the recent rebound in price action we have been seeing, the development has been completely on the side of risk. It has been months since a major bank or industry has teetered on the edge of collapse (and threatened the credit market), which is allowing for equity in the absence of panic. Without growth, though, this advance may fail.

 

Dollar And Risk

Dollar And Risk Tied To Stress Tests, Fed Forecasts

WEDNESDAY, 15 APRIL 2009 21:47:12 GMT

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Written by John Kicklighter, Currency Strategist

Investor confidence in the US and across the globe remains in limbo. The market is waiting for an indisputable sign that growth and rates of return are nearing a turning point; but so far, the weight of recession and lingering financial troubles hasn’t let up.

The Economy And The Credit Market

Investor confidence in the US and across the globe remains in limbo. The market is waiting for an indisputable sign that growth and rates of return are nearing a turning point; but so far, the weight of recession and lingering financial troubles hasn’t let up. However, in the meantime, fear that further financial seizures are just around the corner (a high probability risk just six months ago) has encouraged capital to find its way back into the capital markets from risk-free assets like Treasuries and money market accounts. Looking ahead, there are a few major events that could alter the market’s perception of risk: more optimistic economic forecasts from policy makers and the outcome of the first quarter earnings season. Today, the Fed released its Beige Book with the usual grim assessments. But, this time around there were a few bright spots hinting to the inevitable recovery. Whereas, a return to growth may be a long ways off, the appraisal of business health is active and ongoing. Particular interest will be paid to the revenues of the large US banks - who have so far bested expectations and raised the outlook for the Fed’s ‘stress tests.’

 

A Closer Look At Financial And Consumer Conditions

Market operations and confidence continue to improve. Though demand for short-term Treasuries and relatively risk-free money market paper holds stubbornly to recent record highs, there has been clear interest in reinvesting into the more speculative areas of the financial markets. The more time that passes since the last credit market seizure, the more likely it is that the financial crisis has passed. There are still milestones to risk going forward. In the US, the government’s ‘stress tests’ loom. While this evaluation of health for the nation’s 19 largest banks will be backed by infusions of capital for those struggling, investors will nonetheless take it as a vote of confidence.

The world’s largest economy has yet to mark the worst of its economic recession. Today, the Federal Reserve’s Beige Book painted a dreary (yet unsurprising) picture of activity. Among the highlights, from the economic paper used by FOMC members to determine monetary policy, was a “generally bleak” outlook for employment, warnings that manufacturing shrank nationwide, “weak” consumer spending and altogether signs that national growth was still contracting. However, there were also preliminary signs of improvement. Housing was showing a few signs of stability. More remarkable, the report said 5 of the nation’s 12 Fed districts’ reported contractions were easing.

 

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Forex Market Update

Forex Market Update
Friday, Mar 13, 2009, 13:31 GMT
By John Hardy Consultant/FX Strategist Saxo Bank
SNB shocks complacent market with direct intervention. CHF crosses explode in response: how much further will CHF weaken?
Ugly Canadian employment report sees USDCAD gyrating wildly. Watch out for pre-G20 announcements this weekend.

MAJOR HEADLINES – PREVIOUS SESSION
· Japan Feb. Consumer Confidence rose marginally to 27.6 from 27.0 in Jan.
· Switzerland Producer and Import Prices fell -0.6% MoM vs. -0.2% expected
· EuroZone Q4 Labor Costs rose 3.8% YoY vs. 3.6% expected and 4.2% in Q3
· EuroZone Jan. Retail Sales rose 0.1% MoM vs. 0.2% expected
· Canada Feb. Unemployment Rate rose to 7.7% vs. 7.4% expected and 7.2% in Jan.
· Canada Feb. Net Change in Employment fell -82.6k vs. -55k expected
· US Jan. Trade Balance out at -$36B vs. -$38B expected
· US Feb. Import Price Index fell -0.2% vs. -0.7% expected

THEMES TO WATCH – UPCOMING SESSION
· Japan Feb. Consumer Confidence rose marginally to 27.6 from 27.0 in Jan.
· Switzerland Producer and Import Prices fell -0.6% MoM vs. -0.2% expected
· EuroZone Q4 Labor Costs rose 3.8% YoY vs. 3.6% expected and 4.2% in Q3
· EuroZone Jan. Retail Sales rose 0.1% MoM vs. 0.2% expected
· Canada Feb. Unemployment Rate rose to 7.7% vs. 7.4% expected and 7.2% in Jan.
· Canada Feb. Net Change in Employment fell -82.6k vs. -55k expected
· US Jan. Trade Balance out at -$36B vs. -$38B expected
· US Feb. Import Price Index fell -0.2% vs. -0.7% expected

SNB gets seriousThe Swiss National Bank was out yesterday declaring all out war on the strengthening Swiss Franc, announcing strong new expansive monetary policy measures and getting right down to business with direct intervention in the currency market. The central bank timed the announcement and intervention with an already expected cut to its 3-month Libor target to 0.25% from 0.50%. Lately, the Swiss Franc's strength was closely tracking equity weakness inversely, meaning the franc rallied as the mood soured in equities. The SNB had periodically tried to shoot across the market's bow with verbal intervention in the recent past, but traders seemed to be a bit complacent judging from yesterday's very sharp response to the SNB announcements. The sharp equity rally of recent days coupled with this dramatic new policy response form the SNB sent EURCHF on a rocket ride toward key resistance in the 1.5300/1.5400 area - more than 5% up from recent lows and the sharpest move higher since the Euro's introduction.
The move by the SNB to intervene was accompanied with announcements of new, so-called quantitative easing measures designed to avert the risk of deflation with the purchase of Swiss corporate debt. The SNB has good reason to step in here: the country's heavy dependency on exports makes a strengthening currency particularly dangerous and deflationary as surplus nations are now bearing the brunt of the fallout from the global contraction in trade and consumption. This has been mostly painfully evident in the Japanese experience. Second, Switzerland has enormous exposures to Eastern Europe, particularly in the form of mortgages, as more homebuyers financed in low yielding CHF loans rather than in their local currency during the boom times. Any purposeful weakening of the franc, therefore, is a de facto bailout effort aimed toward Eastern Europe as it helps to ease some of the self-reinforcing process of capital flow pressures on the region. This latter reason allows the SNB to "get away with" weakening its currency to a certain extent without invoking hostility from other nations.
Looking ahead, we suspect that the SNB is not targeting any particular level in EURCHF, though 1.5000 is a likely line in the sand for support, both psychologically for market participants and for the SNB. To the upside, the next big levels beyond the highs today at 1.5400 are 1.5850 and then 1.6000. In general, if the equity rally turns into a larger rally that extends beyond perhaps 800 in the S&P500, we could certainly see a test of the 1.6000 level, whereas if equities turn tail once again, the EURCHF cross is likely to simply stumble randomly in a range as the market is unwilling to fight a determined SNB and unwilling to sell francs due to the old pressures on CHF appreciation still very much in evidence. The next key test for the CHF crosses could come at the April 2 G20 meeting, which could show larger efforts aimed at bailing out the struggling CEE economies. More broadly speaking, this announcement sees the SNB joining the US Fed and the BOE in competitive devaluation efforts: no nation wants an overly strong currency in this global economic environment - and the competitive devaluation theme becomes a dominant one.

JPY crossesThe JPY crosses were a three-ring circus yesterday. Initially, the JPY was stronger on a recovery in US treasuries and a sharp commodity sell-off as we mentioned in yesterday's piece. But then the SNB rolled a grenade onto the trading floor by intervening - the most dramatic instance of intervention in 5 years by any major nation. This sent speculation swarming that the BoJ could now see fit to intervene as well and gave the JPY crosses whiplash with a surge back higher. Any further JPY weakness is likely to be relatively contained in our view as the market is most likely getting ahead of itself on intervention potential, though EURJPY could theoretically extend toward 130.00 in the short term if risk appetite is able to keep up a head of steam elsewhere.
EURUSDLooking at EURUSD, we note that Bunds have come off sharply while traders seem less willing to sell US treasuries. Bund yields dropped below US 10-year note yields for the first time since late 2007 for one day recently, but have now widened back out to an almost 20-bp advantage. As we discussed recently, one driver of USD weakening here could be the market beginning to look for the Fed to start its next round of QE measures soon, including debt monetization. The EuroZone framework and a "reluctant to go there" (ZIRP and QE path) ECB means that the EuroZone will sit out the competitive devaluation games that have now been joined so enthusiastically by the SNB. Just yesterday, Trichet was out objecting to the idea of a EuroBond, showing that the existing framework will stumble along as long as it can. Still, the rally in EURUSD seems to be rather slow going.
G20 pre-meetingWatch out for G20 meeting developments already this weekend, as the April 2 event is so significant that all the major finance ministers and central bankers are meeting later today and tomorrow in the US to discuss the meeting's agenda. There are plenty of disagreements to iron out and we may get clear hints at where things are headed (or whether they are headed anywhere at all if irreconcilable differences prove persistent).
USDCADUSDCAD rose from the brink after an ugly employment report showed the unemployment rate rising to a five year high and accelerating far more rapidly than expected. But a heady resumption of the rally in oil prices and a steady stream of reminders in the press about the soundness of the Canadian financial sector are seeing USDCAD back lower toward the next layer of support at 1.2675.Chart: USDCADThe recent inability for the pair to hold above 1.3000 and fundamental pressures discussed above is putting some pressure on USDCAD. The rising trendline looks like the next key support level below the 1.2675 line of support. Another way to play for a stronger CAD is witha CADCHF or EURCAD trade. USDCAD will need to see 1.2950 again to give bulls renewed hope here.... More analysis: Saxo Bank Market News & Analysis
Risk Warnings:
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.

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