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Euro And Pound Recover, But Aussie Leads the Way

Last updated 3/3/2009 5:29 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA surprises market by keeping rates on hold at 3.25%
• OECD forecasts recession to worsen
• Japanese government to offer loans to corporates
• OIl drops back to $40.bbl
• Gold slides to $924/oz as 900/oz next support

Overnight Eco

• AUD Retail Sales 0.2% versus -0.5% eyed
• AUD Current Account better at -6.5 Billion versus -7.3 Billion projected
• AUD RBA Rate Decision 3.25% unchanged
• CHF GDP -0.3% versus -0.8% expected
• GBP Construction PMI very weak at 27.8 versus 34.2 called

Event Risk on Tap

• CAD Interest Rate Decision expected at 0.75%
• USD Pending Home Sales expected at -3.0%
• USD Total Vehicle Sales expected at 9.6M

Price Action

• USD/JPY rallies towards 9800 on yield demand after RBA leaves rates on hold
• AUD/USD rallies to 6450 as surprise hold put bid intp Aussie
• GBP/USD loses the days highs after weak Construction PMI and slips below 1.4100
• EUR/USD back above 1.2600 but any rally over 1.2650 short lived for now

Both euro and pound recovered off their North American session lows in a quiet rangebound  session  that carried very little event risk on the calendar. However, the star of the show in currency market tonight was the Australian dollar which singlehandedly revived risk appetite after the RBA surprised traders  by keeping its overnight cash rate at 3.25% instead lowering it by 25bp as expected.

As we noted earlier, “Australia’s economy has been relatively immune to the ongoing global economic crisis with employment last month actually increasing by 1.2K jobs versus projections of -18K loss.  Governor Stevens referenced that point noting that Australia's economy is holding up well and is not experiencing  the severe downturns in the rest of industrialized world.”

If Australian economy manages to maintain even a modicum of positive growth this year the Aussie is likely to strengthen on yield differential alone as it will be the only G10 currency (aside from New Zealand) that will not be moving towards Zero Interest Rate Policy. While  a 3.25% yield last year held little appeal in today’s deflationary environment it looks like a king’s ransom and should RBA hold rates steady for the next few months the Aussie will undoubtedly attract capital flows.

Meanwhile in UK the news was not nearly as positive with Construction PMI hitting a fresh low of 27.8 versus 34.2.  The data suggests that activity in UK housing industry has come to virtual halt and the sector now faces near depression like conditions.  Cable sold off on the news dropping below 1.4100 handle after rallying for much of the Asian and early European sessions.

It was yet another blow for pound bulls who had were hoping that the UK economy may have started to stabilize.  The PMI report will no doubt confirm the markets expectation of a 50bp cut from BoE on Thursday, but more importantly may prompt the  MPC to initiate quantitative easing,  further pressuring the pound to the downside.

In North America today, the calendar is very light as well with only the BOC meeting on the docket. The market expects a cut of 0.50% to a cash rate of 50bp as the loonie joins the yen  the dollar and the pound in the club of ZIRP. 

In US the focus is likely to remain on equities which have dropped 14% in the last 12 days.  Although there is little economic news to boost the market, sentiment appears to be so bearish at the moment that a short covering rally could materialize at anytime. Any rise  in equities today should benefit Aussie the most.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.