Forex News and Events:
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After a slight drop in risk appetite due to newswire reports suggesting that BofA will need an additional $34bn of capital, risk taking seems to be creeping back into the markets (Citigroup's shortfall is reported to be "more limited"). Yesterday's Wall Street session closed lower, with the S&P down -0.37%, but Asian regional indexes were able to rally back this morning. Initially, the USD and JPY gained on the negative bank news with the EURUSD trading down to 1.3247 and YEN crosses were also marked lower, with the EURJPY spiking briefly below 130. However, in early European trading, risk appetite has found its sea-legs and is now seeing USD and JPY selling and EM and commodity currencies finding buyers.
In Australia, in seasonally adjusted terms, retail sales surged 2.2% higher in March. This was well ahead of market expectations (+0.5%), which suggests that the government’s second emergency stimulus package has gained traction in the retail sector. Other government data on Wednesday showed the country's trade surplus increased 43% in March, again well above expectations, as exports remained remarkably tough while imports fell again.
The ‘green shoots’ phenomenon has spread to the highest levels with both Chairman Bernanke and Feds Yellen projecting a cheerful tone. Fed's Bernanke testified to the Joint Economic Committee and provided an optimistic outlook, saying "We continue to expect economic activity to bottom out, then to turn up later this year". However, he added "An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall." We hope his forecast for growth is better than his past forecasts in the housing market. Cynicism aside, US economic data has been broadly supportive (non-manufacturing ISM beat consensus by a full point to 43.7) of a year end recovery. Today's release of ADP employment for April will provide guidance for the critical NFP release on Friday. And on a side note, Norges Bank will meet today and we expect the benchmark deposit rate to be cut by 50bp to 1.5%.
We expect FX markets to be range bound in front of Thursdays event packed day. In our mind, Thursday's highlight should be the ECB press conference. It is widely expected that the members will vote for a 25bp cut to 1.00%. What is lacking consensus is the ECB direction on unconventional easing. Rumor and public comments have pointed to divergence views within the historically tight knit ECB. The ECB’s Wellink’s believes the economic crisis is far from over, while Nowotny sees clear signals that the danger has been controlled. The middle view is that the ECB will lay out the framework for easing but provide no timeframe or firm commitment (a tactic used recently by the BoC).
