Markets have mostly been locked in some consolidation following the massive surge in risk appetite on the back of Wednesday’s coordinated central bank action, and it now remains to be seen whether this recovery rally can be sustained. We contend that the rally will not be sustainable, and ultimately, we should once again see a resumption of risk liquidation, with currencies and equities under pressure and the US Dollar as the primary beneficiary. Look for EUR/USD to hold below 1.3500 on a daily close basis.
The central bank actions on Wednesday only reinforce the severity of the global crisis and while necessary, should certainly not be taken as a risk positive. It is true that the actions of the central banks will make money cheaper and attempt to stimulate the global economy, but let us not forget that cheap money means nothing if it is still not accessible. This has been a major critique of these alternative forms of monetary policy measures, and at the end of the day, there are still serious risks of a liquidity trap.
The Australian Dollar which outperformed on the Wednesday risk correlated flows is a gross underperformer on Thursday thus far with some softer retail sales, atrocious building approvals, and disappointing China manufacturing PMIs all factoring into the price action. This all but solidifies an additional 25bp rate cut at next week’s RBA meeting, and we continue to project relative underperformance in the Australian Dollar over the coming weeks and months. Unfortunately, our short position from this week was stopped yesterday at 1.0280, but we still hold onto our core short position from 1.0550.
Data in European trade was mostly on the softer side with a batch of weaker PMI readings. However, there was a ray of light out of the UK as manufacturing PMIs there came out above forecast. Meanwhile, auction results on Thursday were well received, with both the Spanish and French results helping to support the Euro intraday. Fitch’s Riley kept things balanced after saying that France could be at risk for a downgrade should the EMU debt crisis intensify. German EconMin Schaeuble was also on the wires reaffirming the country’s opposition to the idea of Euro bonds.
Looking ahead, US initial jobless claims, ISM manufacturing and construction spending highlight the North American calendar. But as per the usual, we suspect that broader macro themes and developments will influence trade. It will certainly be interesting to see if risk traders can build on the momentum from Wednesday trade. While we remain skeptical, we would not rule out this possibility. US equity futures are tracking moderately lower, while oil is also offered and gold trades flat. On the official circuit, Fed’s Lockhart and Bullard are slated to speak, followed by IMG Lagarde, EU Van Rompuy and EU Barnier.