Currency Contest

Massive Coordinated Central Bank Action Inspires Risk Rally

Joel Kruger,

Early session price action saw a resumption of risk off trade, with the lack of positive headlines or signs of resolution at the Eurozone FinMin meeting inspiring a fresh round of intraday risk liquidation. But markets remained well supported on dips and the picture changed ahead of the North American open as news hit the wires that China had cut the RRR by 50bps. This in conjunction with rumored ECB activity was enough to temper broader concerns, and helped to rally risk assets. Then a bombshell was delivered when the Fed, ECB, BOJ, BOE, SNB and Bank of Canada announced a coordinated central bank action to lower swap rates by 50bps effective December 5.

However, we remain skeptical with any rallies in risk correlated assets and feel that the China news and central bank activity while necessary, only reinforce the fact that the contagion from the Eurozone is in fact spreading to the global economy and necessary measures need to be taken to address the severity of the situation. To us, this is ultimately risk negative.

Looking ahead, we recommend keeping a close watch on the Yen, as we contend that this currency will soon fall victim to relative underperformance even in risk off market environments as pressures mount for official action on the currency’s behalf. We have seen a number of Japanese officials speak out on the subject, with BOJ Nishimura the latest to warn of the possibility for additional intervention. There are stops above 78.30 in USD/JPY, so look for a break above to accelerate gains.

Moving on, month end flows could also be a factor in Wednesday trade, and it is worth taking this into consideration. Markets have a way of moving more aggressively on the final day of the month and given the existing volatility, we could see some big moves. Looking ahead, in North America, US ADP employment, Canada GDP, Chicago PMI and US pending home sales are the stand out releases. US equity futures have recovered and are tracking higher by some 0.80%, while commodities are slightly bid.