Forex News and Events:
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Market optimism which was anticipated from the transition of power at yesterdays historical Inauguration failed to translate into market gains. Equity markets plunged in the US, led by losses in the financial sector, sending risk appetite lower again, as the S&P closed down over 5% (the biggest drop on inauguration day in history). President Obama didn’t provide any real details of importance in his speech. He stated that the US was at war with a ‘badly weakened economy’. He noted that the economic crisis was the consequence of ‘greed and irresponsibility on the part of some’, and promised to keep a ‘watchful eye’ to ensure that markets do not spin out of control. He also added that people in charge of managing Americas money ‘will be held to account’.
Yesterday the Bank of Canada cut its policy rate by 50bp to 1.00% as expected. The BoC's accompanying statement was moderately hawkish with the key policy portion being " the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target (inflation target) over the medium term...," which the market viewed as a signal that the BoC would not commit to further easing and this gave the CAD a momentary support before risk aversion trade began weighing on the rally.
Tuesday release showed a slight rise in German ZEW index in January, with the headline economic expectations index rising from -45.2 to -31.0. This tick up suggests that the newly announced fiscal support has provided a glimmer of hope. However, we need to take this figure with a bit of skepticism since the ZEW expectations index has failed to be a reliable gauge of German GDP growth in the past. The more accurate indicator, the IFO index, has continued to collapse.
Overnight Bank of England Governor Mervyn King detailed the BoE's choice for asset purchases in light of Monday's announcement of the formation of an Asset Purchase Facility in a speech to the Confederation of British Industry. Mervyn King stated both on "credit easing" purchases and the likelihood of asset purchases for quantitative easing. While he was keen to stress that a move to zero interest rates and quantitative easing was still undecided, the BoE have already begun to prepare for such an event.
New Zealand retail sales printed higher than market expected with headline retail sales flat in November (-0.9% m/m exp), while ex-auto retail sales were up 0.3% m/m (no change exp) .We continue to expect that the RBNZ will cut rates by 100bp next week, since the that the small up-tick in core retail sales (ex-autos) was due to increasing food prices and not directly caused by increased demand.
