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The dollar continued to strengthen against the high beta currencies throughout the Asian and early European trade today as risk aversion and mixed economic news continued to weigh on euro, pound and Aussie. With little economic data on the calendar the pro-dollar flows that have dominated trade since the start of the week continued, but EUR/USD managed to hold the 1.2900 figure despite several attempts over the past few days to take the pair lower.
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US Retail Sales for March printed much worse than forecast at -1.1% versus expectations of 0.3% gain. Less autos the number also printed weaker at -0.9% versus 0.0% projected. The news was a blow to recovery bulls who had argued that US consumer demand was stabilizing as the US economy was in the process of carving out a bottom.
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A relatively quiet night of trade in the currency markets punctuated by some profit taking in high beta currencies after the euro, the pound and the Aussie all rallied strongly yesterday as risk appetite continued to dominate trade. Today the mood has been t more somber with US equity futures pointing to a lower open despite the fact that Goldman Sachs reported better than expected results yesterday after the close of US equity session.
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With many of the markets in Asia Pacific and most of Europe still closed for Easter holiday, trading in the currency markets was characteristically quiet with risk appetite the dominant theme as high beta currencies staged a slow but steady rally throughout the night . The action started in very early Asia when stop running in the AUD/USD pushed the pair through the 7300 handle in very thin trading conditions. Aussie retreated off the highs settling near the 7250 level but it set the tone for the rest of the day as euro, pound and other high beta currencies all rose in tandem.
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The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.
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Buoyant equity markets reignited risk appetite in currencies tonight as both Asia and Europe extended the gains made yesterday in DJIA on the back of better than expected ISM Manufacturing numbers. The iSM report showed a small measure of improvement across most of its components fueling a rally in stocks on the belief that US demand may have finally stabilized.
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Tomorrow the ECB is expected to lower rates by 50bp bringing the overnight rate to 1%. Given the gloomy recent economic data t from the region, the rate cut seems almost pre-ordained. With EZ unemployment rising to a three year high of 8.5% while retail sales in Germany, the union’s largest economy, contracting by another -0.2%, the situation on the ground remains grim. Therefore the markets are pricing in a 100% possibility of a 50bp cut.
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European equity markets were broadly higher in early morning trade fueling risk appetite in currencies as all the majors with the exception of the yen rebounded against the buck after yesterday massive sell off. The Asian and early European trade was characterized by strong carry flows with yen crosses helping to lift the euro the Aussie and the pound.
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Over the past 24 hours, it has become increasingly clear that the bear market rally in currencies and equities is over. U.S. stocks plummeted close to 4 percent sending investors back into the safety of the U.S. dollar and Japanese Yen. Renewed concerns about the U.S. economy was the primary catalyst for the risk aversion but repatriation also added to the upside pressure in the two lowest yielding currencies. With 24 hours to go before the end of the quarter for most U.S. companies and the end of the fiscal year for the Japanese, repatriation has been particularly strong as companies bring money home to window dress their balance sheets. The U.S. dollar strengthened against every major currency except for the Japanese Yen.
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Compared to yesterday’s sharp moves in the currency and equity markets, trading has been relatively quiet. U.S. stocks meandered in and out of negative territory while the U.S. dollar traded higher against nearly all of the major currencies. Profit taking has hit the financial markets dragging equities and currencies lower. This consolidation gives investors the time to think about whether Monday’s rally is the beginning of a new bull market or just a strong bear market rally. Since March 6th, the S&P 500 has increased 23 percent, which is marginally less than some of the rebounds that we saw during the Great Depression. The point is that equities could still extend its gains while remaining in an overall downtrend.
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High beta currencies enjoyed a rally for the second night in a row boosted by further gains in equities and continuation in risk appetite. Carry flows were once again the dominant theme in Asian trade with USD/JPY rising to 98.40 while many the yen crosses reached their highest levels since last October. The Nikkei followed through on the nearly 500 point gain in the Dow rising 272 points but the gains on the European markets were decidedly more modest with most indices barely above break even.
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Euro spend most of the Asian session consolidating and correcting some of its massive gains from yesterday, but jumped higher to take out the 1.2950 level as European trading began. On a night when the economic calendar was essentially barren risk appetite flows dominated trade as the pair oscillated around the 1.2900 handle.
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Volatility has ripped through the foreign exchange market as the U.S. dollar gave back its earlier gains. Safe haven flows drove the dollar higher at the beginning of the U.S. trading session, but the currency lost value when equities took off. The big story in the foreign exchange today was the Swiss National Bank’s controversial and nuclear decision to intervene in the currency market, raising fears of a global FX war. By coming into the foreign exchange market to sell Swiss Francs, the central bank has driven the Euro and U.S. dollar sharply higher. The gains in these currencies were exacerbated by the rally in U.S. equities and a stronger retail sales report. The rally in the foreign exchange market today indicates that risk appetite has improved.
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The U.S. Dollar has weakened against all of the major currencies this morning following the stronger profit forecast from Citigroup. However the correction will most likely be just a hiccup in the dollar’s overall uptrend as the uncertainty about the financial sector has yet to be resolved.
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There have been a lot of big swings in the currency market over the past year. Eight months ago, the EUR/USD was trading at a record high of 1.60 and now it is only few cents away from its 3 year low.