US session picked up its efforts to reduce the risks

Monday, January 25, 2010

The desire to move out of riskier assets continued on into the US session on Friday, though there were pockets of support for certain Forex currency pairs found at the lows.

GBP traded on the soft side after a weak retail sales print (+0.3% m/m vs. +1.1% expected) while the impact of the Cadbury takeover appears to wane and the USD started to gain favour.

EUR on the other hand outperformed its peers for a change amid some hopeful talk of a Greece plan to be announced at the weekend (ECB’s Torres said a Greek assessment plan would be ready by February 3rd and in the meantime Greece reaffirmed its commitment to stay in the EU mechanism).

CAD was also under a bit of pressure, again on a weak retail sales number (this time -0.3% m/m vs. -0.2% prior).

In addition to the recurring concerns about Greece’s fiscal position, an immediate threat of a China tightening and the effect of US president Obama’s banking reforms, markets were also concerned about the increasing debate on Bernanke’s re-appointment for a second term as Fed chairman (though subsequently weekend press was more supportive of his appointment with a number of US senators assuring that they would vote in favour).

Nevertheless, Wall St endured its third consecutive down day with cumulative losses of over 5% and registered their worst weekly performance since the market bottomed last March.
The slightly positive developments on some of these fronts have led to a slight rebound in risk during the Asian session today.

However, this was not before we had the usual hair-raising volatility in the thin liquidity conditions at the start of trading with risk initially looking decidedly “off” but it transpired this was more likely linked to a stop-hunt exercise as we had a strong rebound from the lows and equity markets, albeit still in the red, mounted a recovery from the early lows.

GBP found enough legs to make it back above 1.61 again but still looks a bit shaky. In an interview in the Sunday Times over the weekend, Chancellor Darling remained cautious over the economy’s outlook, saying it still needed government support.

He was also a tad skeptical about Obama’s proposed banking reforms (which could be seen as appositive for the City of London).

The Guardian newspaper reported that UK PM Brown was planning to exploit Obama’s crackdown on Wall St banks to further Britain’s campaign for a new global transaction tax on financial products, and intends to use a series of meetings in the coming weeks and months to build international support for a "Tobin tax", which he floated at last autumn's G20 meeting.

The Bank of Japan starts its 2-day policy meeting today, the first of 2010, with the central bank coming under increasing pressure to attack deflation.

Governor Shirakawa is on record pledging easy monetary conditions and there is a chance that the bank’s other options will come in to play, namely expanding the credit program or increasing its monthly purchases of government bonds, increasing the limit on the newly introduced fund supply operation or even introducing schemes of a longer-duration. Its assessment of the economy is expected to remain unchanged, noting an expected improvement though most definitely at a moderate and subdued pace.

With a quiet start to the week on the data front, it will be interesting to see if the slightly better mood from Asia extends into the week. The data highlights for the rest of the week include UK Q4 GDP tomorrow, the FOMC meeting on Wednesday followed by US durable goods orders on Thursday and Q4 US GDP on Friday. For the Euro-zone, focus centres around confidence indicators on Thursday and unemployment Friday.

Today’s risk events are limited to German GfK consumer confidence and US existing home sales.



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