Why The Rally in Risk FX?

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Market Drivers for April 16, 2013
Yen crosses recover as bargain hunters step
ZEW weaker but EURUSD shrugs off the miss
Europe -0.69% Nikkei -0.41%
Oil $87.95/bbl
Gold $1376/oz.

Europe and Asia:
EUR ZEW 36 vs. 42
GBP CPI 2.8% vs. 2.8%

North America:
CAD Manufacturing Sales
USD Building Permits 8:30
USD Capacity Utilization 9:15
USD Industrial Production 9:15

Risk currencies shrugged off dovish central bank commentary, weak economic results and the lingering concerns over the terrorist attack in Boston to stage a short covering rally after yesterday’s massive selloff during North American trade. USD/JPY which at one time plummeted to 95.65 came roaring back to trade near the 98.00 level by mid morning European session. The recovery in yen crosses helped to lift other high beta currencies as the day progressed.

Earlier in Asia, the release of the RBA minutes reiterated the theme that the central bank has scope to lower rates further and policy makers went out of their way emphasize that the Australian dollar remained “high”.

The RBA stated,”Interest-sensitive parts of the economy were responding to the historically low levels of lending rates and it remained likely that this had further to run.,At the same time, the factors weighing on the economy — including the high exchange rate, the waning growth of mining investment, and fiscal consolidation — were likely to persist.”

Australian monetary authorities clearly do not want to see the Aussie above the 1.0500 level but the pair continues to be bolstered by carry trade demand. Although yields in Australia declined across the board today, the AUD/USD nevertheless recovered off the lows trading well above the 1.0350 level as the carry traders plowed into the pair. Unless the RBA actually follows through on its threat to lower rates further, the bargain hunters will continue to swoop into the pair on any dip in price.

In Europe meanwhile the ZEW survey printed weaker than expected at 36 versus 42 reflecting the tensions in March precipitated by the banking crisis in Cyprus and the overall decline in business activity. However the euro shrugged off the data and rallied towards the session highs hitting 1.3090 before pausing. The pair remains remarkably resilient as it continues to hold above the 1.3000 level on market speculation that the worst may be behind the Eurozone and that economic growth especially in Germany will turn positive as the quarter proceeds.

In North America today, the economic calendar is relatively quiet with only Building Permits, Industrial Production and CPI on the docket. The most recent batch of US data has shown a slowdown in economic activity and if today’s reports continue this trend the overnight short covering rally in risk FX may start to run out of steam. The market appears to have calmed after yesterday’s horrifying events in Boston, but if there are any fresh incidents today, risk aversion could return in a heartbeat. Therefore trade in North American session could be volatile and reversals are possible as the day proceeds.

Boris Schlossberg
Managing Director

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