Forex News and Events:
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Risk appetite is on a roll, as participants have shrugged off concerns over the US bank stress test, swine flu, bankruptcy in the automotive sector, potential of ECB QE and trepid global economic environment to acquire risky assets. Risk correlated FX crosses did well with EM currencies performing strongly (USDMXN falling to 13.2525) and broad USD weakness. Equity markets steamed forward with the S&P up 3.4% closing above 900 for the first time since early January. Crude and copper prices continued to make strong headway as bright spots in the global economy are appearing with increasing frequency. Data from China and the US encouraged “green shoot” theorists. First was China’s PMI data, which showed expansion to 50.1 from 44.8 in April. Later in the day, US pending home sales for March increased by 3.2%, while construction spending rose 0.3%. These two economic indicators captured the markets' attention since they both cut to the core of the financial crisis. In addition, other housing indictors have suggested similar positive activity and should the market rebound we should see further relief in banks balance sheets.
Without a doubt, the day will clouded by the Fed's plan to deliver the result of the Bank Stress Test to bank executives. According to people familiar with the matter cited by various reports today, 10 of the 19 banks will need additional capital. The WSJ reports that Administration officials believe many banks will be able to source capital without the support of the Troubled Asset Relief Program's remaining $109.6bn. Markets will be searching for any kernal of information. A portion of this risk rally could be attributed to the fact investors finally see an end to the financial sectors ills, with the Fed giving them a clean bill of health or prescribing the appropriate medicine. We are still in the minority position that the market is miss-pricing risk and expect the USD selling to come to an abrupt halt. Vital to this thinking is that while the ECB is debating wether to move forward with any unconventional easing, the Fed 2 month old program is bearing fruit. Should this rally continue, markets will examine which central banks are proactive in ensuring a sustained recovery and that will lead global investors to the US .
In the Asian Session, the RBA held rates at 3.00% as was widely expected. In the accompanying statement the central bank again stress downside risk to domestic economy but this time put additional weigh on the expected recovery in the tail end of 2009. In addition the statement hinted that additional rate cuts would be data dependant stating "...In assessing whether further reductions in the cash rate are required…the Board will monitor how economic and financial conditions unfold... ". The AUD has benefited from the rally in commodity prices, firm domestic building approvals and proximity to China to charge above 0.7400 against the USD.
