The dollar gained strength against the majors as rally riskier assets subsides in early trading. The EurUsd fell a bit over 100pips to the mid 1.29 level, while the UsdJpy moved slightly lower to 95. The GbpUsd dropped 125pips to the mid range of 1.53, consistent with the pullback in other asset classes. Equity markets opened lower in the US with the Dow down 100pts, following the trend of European stock indexes. Commodities are mixed with crude oil higher by 2.3% at $51bbl, and gold marginally lower at $814oz. Bond yields fell with the 10 and 30yr tighter by 10 and 8bps respectively, a bit displaced from the risk aversion trade.

Seems the TALF and Citigroup bailouts are becoming a memory to Traders as the rally in stock markets fade, and buyers of secure assets like US treasuries return to the marketplace. The introduction of the EU stimulus plan had little effect on FX prices, the euro remains tightly correlated to movements in other asset classes. The package is worth 1.5% of GDP, which is approximately 200Bln Euros. It will be interesting to see how the capital is deployed, as those details have yet to be announced. ECB President Trichet mentioned the possibility for further rate cuts based on decreasing inflation, and the steep decline in German CPI may support easing in monetary policy. In the UK, GDP came in line with expectations at ‐0.5%, and 0.3% YoY. Private consumption was slightly better than expected at ‐0.2% vs. ‐0.3%, lending further evidence to a deteriorating economic environment.

US Durable goods sank far more than estimated at ‐6.2% vs. ‐3.0%, this is a fairly significant and severely negative data point. The contraction in growth is likely to expand in upcoming quarters, as consumers cut back personal spending, setting the stage for a No relief in the housing sector as new home sales collapsed ‐5.3%, while this is a volatile number we can expect a slight better readings as mortgage rates come down. The risk aversion trade may continue to prop dollar prices, but the economic fundamentals in the US and Europe tell a drastically different story.

ACM Forex
Advanced Currency Markets