Risk Aversion continues to be a key driver in the market place, as the dollar extended yesterday’s losses against most of the majors. The EurUsd rose over 130 pips to low range of 1.28, while the UsdJpy fell 112 pips to high 96 level. The GbpUsd soared 230 pips to 1.61 as pair has traded consistently with the appetite for riskier assets. Equity markets were mixed with the Dow slightly lower following the 10% jump in the previous trading session. European stock indexes rose with the exception of the DAX, which has been largely influenced by the recent activity surrounding Volkswagen. Bond yields tightened across the curve with the 2yr lower by 8bps and the 10yr by 3bps. Commodities climbed higher across the board as crude oil gained 3.76% to $66bbl, and gold up 1.75% to $760oz.

German CPI came in better than expected at ‐0.3% vs. ‐0.2% exp, which is largely due in part to lower energy prices. Lower inflation should definitely relieve the consumer from pressure felt in the housing and credit sectors. The market will be watching closely for more clarity regarding the global easing in monetary policy, which should be a driver in Eurodollar trading. In the UK, money supply rose 1.5% vs. the prior reading of 1.4%. Net consumer credit retracted drastically as the reading was announced at 0.3B vs. 1.0B exp. Lastly, mortgage approvals were slightly better than anticipated at 33k vs. the consensus figure of 33k. The economic picture which looked very bleak is showing glimmers of hope, but the credit situation has a long way to go before we can call this the beginning of a recovery.

The FOMC rate decision is scheduled to be announced and the market is looking for a 50bps cut to 1.00%. The action in monetary policy is most likely priced in by Traders, the key driver in price behavior will be more a clearer time frame for the end of the financial crisis. We are seeing certain points evidence that suggest the economy is improving, durable goods orders stronger than estimates at 0.8% and also an increase in mortgage applications to 16.8% vs. ‐16.6% last month. US GDP will be released tomorrow and the reading will most likely be negative. This really wouldn’t surprise the market as the recent appreciation in the dollar has constrained exports. Once a consistent pattern of positive economic data is established, we should look for a divergence from the extreme risk aversion trading.

ACM Forex
Advanced Currency Markets