Today’s markets have seen some of the most sustained inactivity in months. With US equity markets closed and new economic data at a minimum, the currency market decided to take a breath and allow time for this week’s developments to filter through. We are left with some time to further contemplate the notion of whether or not we are in the midsts of a bear market rally or a complete market reversal. The yen strengthens by less than 40 pips while the pound was virtually unchanged today. The euro advanced by about 60 pips, hardly making up for this week’s 400 pips in losses. Among commodity currencies, the big mover was USD/CAD, rising by about 20 pips.

Markets today are exhibiting the usual signs of uncertainty in light of a new month that has not exactly gotten off to the best start. Among currencies, the Euro, Pound, Canadian dollar, and Australian dollar all showed weakness against the dollar. USD/JPY on the other hand clearly exhibited dollar strength, as a surge to 101.00 is currently under way. The one currency that has managed to buck the trend has been the New Zealand dollar which only narrowly is holding on to gains. Nevertheless, the main driving force is the drop on the Dow today. However, as a sign of resilience in even a down market, the Dow rebounded off of exaggerated losses that extended down by nearly 150 pips to close down 41.74.

The last trading day in the first quarter of 2009 has ended with a bang. The U.S. dollar sold off against most of the major currencies as repatriation flows come to an end. U.S. economic data was weak, but not a game changer and therefore currency investors chose instead to focus on the positive implications of Japan’s stimulus package and the IRS’ new tax break for U.S. car buyers. The currencies that are performing the best against the U.S. dollar are the ones whose central banks are not expected to adopt quantitative easing, namely the Australian New Zealand dollar.

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.

The minutes from the latest Reserve Bank of Australia policy meeting suggested that further rate cuts may be coming. Although RBA board noted that “monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect,” the Australian monetary officials noted that the economic benefits from the massive rate cuts “remained unclear”.

With no fireworks from this weekend’s 3 big event risks, the rallies in the currency and equity markets are fizzling. Having been up more than 150 points intraday, the Dow Jones Industrial Average ended the U.S. trading session down 7 points. This lack of follow through was replicated in the foreign exchange market with the Euro and British pound giving up earlier gains. Promises can only take the markets so far and the lack of concrete actions by the G20 has disappointed investors. Although we have previously mentioned that bear markets can rally as much as 25 percent, today’s intraday reversal is worrisome. Looking at the economic calendar this week, there is not much event risk to energize investors

This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks. Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors. For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue. There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.