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Currencies Back Under Pressure in Early Week as Risk Liquidation Resumes

Volatility could pick up into the new week following a few sessions of relatively quiet trade which saw the USD back under pressure a bit across the board. However, we continue to project additional broad based US Dollar strength going forward and would look for any weakness in the Greenback to be very well absorbed at current levels. Certainly, the ability for both the Greeks and Italians to resolve their political turmoil has helped to calm markets somewhat, but the formation of new governments in these countries hardly dismisses the unlimited amounts of debt problems in peripheral Eurozone nations and the potential threat of contagion to the core. This coupled with softer economic data in the region, widening bond spreads and reduced exposure to certain local banks continues to suggest that we could very well see additional risk liquidation going forward which ultimately is seen benefiting the buck.

Let us also not forget what we believe will be the onset of a third phase of the global recession, with China, Australia, New Zealand and the emerging markets all expected to undergo a bout of relative underperformance (even against the Eurozone) in the near future. While these markets have managed to outperform as non-traditional safe-haven alternatives to the beleaguered US and Eurozone economies, the idea that these markets have been traded as safe-havens, and the notion that decoupling applies in these markets does not sit well with us. In fact, we have already begun to see a material slowdown in the Chinese economy, with the latest batch of weak data reaffirming our downbeat outlook for the country. Any slowdown in China will surely then have an impact on the highly correlated Australian Dollar, which in turn should also weigh on Kiwi, and then spill into the emerging markets as investors realize that these economies are also well exposed. The IMF and G7 have both been out recently warning that the global economy faces significant downside risks which will temper any upside in risk appetite.

On the data front, we have seen some offsetting data out of New Zealand, with retail sales coming in better, while performances of services showed deterioration. The balanced data has been helping to keep Kiwi trading relatively flat on the day despite the risk environment. Elsewhere, in Switzerland, PPIs came in a little firmer, while Eurozone industrial production was a wash, with monthly data improving while yearly was disappointing. Looking ahead, the economic calendar for the rest of Monday is empty with no data in North America. US equity futures are tracking lower along with commodities prices.