We are finally starting to see movement in the markets following a period of consolidation over the past several days, and as we suspected, the break in the price action has been in the US Dollar’s favor on a fresh wave of risk liquidation. Market participants are once again very concerned with the developments in the Eurozone and today it has been the widening in Italian bond spreads and concurrent actions by the LCH to raise charges on Italian bonds that has opened the door for some broad based selling of currencies.
Naturally it is the higher yielding currencies that have been hit the hardest as a result, and the Australian Dollar stand out as the gross underperformer. Also seen weighing on sentiment has been news that the ECB had tapped its overnight loan facility, and comments from Fitch that say European investors see the risk of a double dip recession tripling since the second quarter of this year. Despite some highly concerning trade data out of the UK, which also showed wider revisions to the previous print, the Pound has managed to post gains against most of the other currencies with the risk liquidation theme taking precedence over any disheartening local fundamentals.
Indeed, the Yen has managed to find some renewed bids in recent trade as well, but following a significant round of MOF intervention in the previous week, we suspect that any Yen bids will be easily absorbed ahead of a fresh bout of Yen weakness (ie USD/JPY higher). Look for the current round of setbacks in Usd/Jpy to be well supported in the 77.00’s, with only a daily close back below 77.00 to negate outlook.
Looking ahead, the economic calendar for Wednesday is rather light, with Canada housing data and US wholesale inventories as the only notable releases. On the official circuit, Fed Bernanke, and Fed Tarullo are slated to speak. Meanwhile, the Bank of England has kicked off its 2-day policy meeting. US equity futures are getting slammed into North American trade and track lower by some 2%, while on the commodity front, oil is well offered and gold trades flat.