The dust settles after US “shock” downgrade

Risky assets have staged a recovery this morning after yesterday’s rout. The perfect storm of European and US sovereign debt concerns caused investors to flee from risky assets yesterday. Today, stocks have regained their footing along with risky FX and AUDUSD is back at 1.0470/80 after falling to a low of 1.0455 yesterday.

Risk sentiment is dominating markets, so today’s price action may be just a pause. Thin volumes in a holiday-shortened week along with a lack of Fed speakers until 27 April, when Bernanke hosts his fist ECB-style post-policy decision press conference, should keep the markets on edge for the rest of the week.

The euro has managed to claw back some of yesterday’s losses but the single currency remains weak. EURUSD fell below a key support level at 1.4250, but has since risen to the 1.0500 level.

Today’s EUR 1.25bn 13-month Greek debt auction was a risky move from Athens. 2-year bond yields hit 20 per cent yesterday and investors are now pricing for a restructuring within a number of months instead of years. However, the auction was successful and the gamble paid off. Athens sold EUR1.625 bn of 13-week Treasury bills today and investors bid for 3.45 times the amount of securities offered. Greece had to pay up at this auction, however, and the 13-week yield demanded from investors was a whopping 4.10%. The euro remains fairly steady in the aftermath, and the fact that the auction wasn’t a disaster should help to calm markets further.

Gold remains close to record highs and within touching distance of the $1,500 an ounce level. In an environment of sovereign risk both in Europe and the US gold could push even higher. Silver continues to outperform the gold price as it gets bought as a safe haven and oil remains on the back-foot. Brent crude is hovering just above $120 per barrel after a 3.3 per cent drop since Friday on global growth concerns as austerity measures bite across the developed world.

Elsewhere, the Swiss franc is lower and the yen is also stabilising. USDCHF found its feet above 0.8950 and USDJPY is creeping back towards 82.50/60. At these levels in USDJPY we think that intervention risk from the Bank of Japan and possibly other global central banks is something to watch out for especially if we see any sharp moves lower in the yen crosses.

We have become accustomed to ECB speakers talking in a hawkish tone in recent months, but that was reversed yesterday when ECB member Bonello urged caution on the pace of policy normalisation saying that the economic recovery in the currency bloc remains fragile. We continue to think the ECB will hike between two and three times this year. Since yields have been such a benefit to the euro in recent months we think that the future for EURUSD could depend on US rate expectations. So, if the Fed seems like it won’t hike until late Q1 or late Q2 in 2012 then should boost the euro going forward.

Elsewhere, the RBA minutes didn’t shed much light on the prospects for further rate hikes in Australia and the Aussie is trading in line with risk sentiment today.

Ahead today, Canadian inflation data later this afternoon is the highlight. The market is looking for annualised headline inflation to jump to 2.8 per cent in March from 2.2 per cent in February, and core inflation to rise to 1.2 per cent from 0.9 per cent. Core inflation pressure is still low in Canada and unless we get an upside surprise then today’s data is unlikely to shift expectations for a near-term rate hike.

Source: Forex.com

19.04.2011