Forex News and Events:
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The much anticipated results of the US bank Stress Test failed to soften investor’s optimism, despite 10 firms requiring nearly $75bn in new capital. US equity markets closed slightly lower and the USD was able to make some headway, as traders braced themselves for uncertain events (US 30year yields rallied sharply after the 30year auction went quite badly). However, on the release, with no significant deviation from previous leaked results, the USD was sold off and Asian regional indexes were able to open higher. In FX markets EM and commodity currencies found buyers as risk appetite improved..again. Fed Chairman Bernanke said the stress test results should give the public "considerable comfort". Although we see that systemic risks are clearly still in place, the result does clear a major risk hurdle. Stimulus efforts and cyclical factors have helped stabilize overall conditions, but for growth to truly begin, credit needs to start flowing back into global financial systems and that will be the next big hurdle for the financial sector. Earlier in the day, the ECB announced unconventional policy of purchasing covered bonds, which Trichet has strenuously denied that this is quantitative easing. Although this was a historical step for the ECB, the 60bn Euros are a small amount in comparison to other central banks and could be a case of too little, too late. The EUR was able to gain on the news (after a knee jerk sell off) as market now views QE in a more positive light, after the Fed's and BoE's success. In addition, the ECB cuts rates 25bp to 1.00%, held the refi rate at .25%, and expanded fixed priced funding all the way out to 12-months, as was widely expect. The Bank of England kept the official rate unchanged and increased the size of its Asset Purchase Facility (APF) by £50bln to £125bln while remaining under the maximum possible size of the APF of £150bln, which the BoE and Chancellor Darling had decided previously. The MPC's decision to increase total asset purchases by a full £50bn to £125bn was a surprise, in particular in light of the recent improvements in UK survey data, spurring Sterling selling. In Australia today, the RBA's minutes provided a clear signal that it maintains an easing bias. First, the RBA pointed to its shift towards making smaller and less frequent changes to monetary policy. Second was that the RBA is looking for GDP contractions in Q1 and Q2 of 2009 of -1..25% and -1.0% and finally underlying inflation running at the bottom of its 2-3% target band in late 2010. Ahead today, the employment report is expected to show a 600k decline in non-farm payrolls, forcing the unemployment rate up to 8.9%. We expect labor market indicators to deteriorate further, although a better-than-expected ADP employment report implies upside risks. However, the correlation between the two series is small at best.
