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The greenback faces broad selling today as risk tolerance improves along with equity rallies. The equity rallies were primarily fueled by the gradual uncovering of stress test details and upbeat earnings. The same story of components have been the major market driver for the entire week .Today however, we threw some new factors into the mix including some of the only relevant economic data to be released this week. Even though markets are still net losers since Monday, the voice of optimism is still clearly audible. The Dow today advanced by about 100 points. The dollar was stronger against the pound and yen, but lower against the euro, cad, aussie, and kiwi.
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This week’s primary influence has been deeply rooted in speculation over stress test results as well as the flood of earnings reports that, so far, indicate that profits are on the rise. These mixed signals have been too much for the Dow to bear. The index was sent back and forth between positive and negative territories. Within the last hour of the trading day, the Dow plummeted off of 60 point gains to end the day down more than 80. Nevertheless, the market may remain range bound until the entire earnings season has played out and all stress tests have been made public. Until this time we may be subject to a constrained trading pattern. The currency markets choose the pound to be the big loser of the day. Otherwise, the dollar rallied against the commodities currencies but fell against the yen and euro.
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The U.S. dollar initially traded higher after the Treasury released details for the Public-Private Investment Program aimed at taking bad debts off bank balance sheets. Their actions help to create a floor under the toxic assets, reassuring global investors. However early gains in the U.S. dollar was overshadowed by the massive rally in the U.S. equity market. The 6.8 percent rise in the Dow or close to 500 point move reflected stronger risk appetite and growing demand for higher yielding currencies such as the Euro, Australian and New Zealand dollars at the expense of the greenback. If the Dow hits 8000, we could see a new 2 month high in the EUR/USD above 1.38.
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With U.S. equities rising more than 5.5 percent today, one would expect the improvement in risk appetite to drive the U.S. dollar lower against all of the major currencies. Unfortunately we did not see a broad based sell-off in the U.S. dollar. The greenback only weakened against the Euro and commodity currencies because investors continued to bail out of British pounds and Swiss Francs. It is also interesting that the EUR/USD is well off its highs indicating that the market’s appetite for dollars has not waned dramatically. The catalysts for today’s rally are not convincing and the moves in the currency market are fizzling, which suggests that we have witnessed nothing more than a bear market rally.
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Markets are once again entrenched in a fear induced environment. Global equity markets are spiraling downward on continued disruptions in the stability of the global financial system. The promise of stability is nowhere to be found, as situations are only worsening despite continued governmental efforts. The concerns over the financial sector in particular have added to investors fears. Between the British nationalization of Lloyds Banking Group and AIG’s proposal for another bail-out, the survivability of financial companies is in question. Currencies have reacted with a determination on dollar strength. As the yen continues to lose its status as safe haven, the availability of a risk-free environment is almost completely limited to the United States. The dollar advanced against the Euro, Pound, Yen, Canadian dollar, Australian dollar, and New Zealand dollar.
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Cable has fallen a remarkable 400 points at the starts of this week’s trade hitting lows not seen since the end of January. What’s behind the sell off and is it likely to continue? Tonight’s drop in the pound was triggered by yet more bad news from the UK banking sector. Shares of Lloyds PLC tumbled 14 percent after UK’s biggest lender ceded corporate control to the government in return for state guarantees covering more than $367 Billion of assets.
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All of the major currencies ended Friday’s trading session virtually unchanged against the US dollar. However the muted performance masks significant intraday volatility. The Euro for example raced to a high of 1.2754 following the US non-farm payrolls release but choked up nearly all of its gains on more uncertainty in the financial market. Similar price action was seen in USD/JPY. The currency pair dropped to a low of 96.58 in the European trading session but after a post payrolls rally it ended the US session above 98. The equity market was not spared from the volatility with the major indices falling to fresh 12 year lows before significant reversals. With no major US economic data near the beginning of the week, fear and uncertainty could lead to more volatility in the currency market.
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The uncertainty expressed over the threat of a deep US recession and the third CitiGroup bail-out drove the dollar index to a three year high. Apparently, the dollar has maintained some of its safe haven status. Equities have finished a volatile trading day as a result, plummeting 125 points at the open, only to rally back. Unfortunately the bears won out in today’s battle at the tune of -60 points. The month of February reaped a toll on any possibility of a US rebound, as the Dow stumbled to lows not seen since the nineties. Hopefully, March will have more to offer
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The euro consolidated near the 1.2700 figure in early European trade boosted by better than expected German Consumer confidence numbers while pound tried to shrug off RBS news which reported the largest corporate loss in UK history and announced that the government may take up to 95% stake in the company.
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Currencies and equities have strengthened across the board suggesting that risk appetite may be improving. The dollar, which has been a refuge for safe haven flows, fell against all of the major currencies except for the Japanese Yen. In fact, the rally in USD/JPY has been voracious with the currency pair rising 2.5 percent to an 11 week high. The move today has been driven by a variety of factors, none of which in our opinion are meaningful enough to sustain the rally.
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The much anticipated announcements from Washington have triggered a dramatic turn in the currency and equity markets. With investors flocking back into the safety of US dollars and the Dow Jones Industrial Average falling 381 points, it is clear that investors are not satisfied with the Obama Administration’s new programs to unlock the credit the market and rescue the financial sector. If today’s announcements were to be measured by their ability to restore confidence in the financial markets, then the new President has failed miserably. Fortunately we are more optimistic and believe that economic stability will be restored under Obama’s leadership, but patience may be needed.
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The pound was decimated at the start of weekly trade today dropping more than 200 points off its highs as traders absorbed the details of new UK government rescue package of the banking sector.