Market Brief

The Usd was broadly weaker in the Asian Session, as markets shrug off negative news to focus on the positives. The EurUsd traded up to 1.3386 from 1.3260, while the UsdJpy was range bound between 97.20 and 97.80. Risk-correlated currencies have generally continued to outperform, despite the WHO raising the Swine Flu alert to level 5. Perhaps the biggest cause of optimism appears to be a stronger than consensus US personal consumption data, which more than offset the significantly weaker than consensus US GDP data at -6.1% annualized. In addition, stronger than expected corporate earning from 37 S&P 500 firms helped risky assets. The FOMC held few surprises when decided to hold rates and provided the market with a brighter economic assessment (less bearish than expected) in the accompanying statement. The BoJ left rates unchanged at 0.10%, as was universally expected, and will maintain monthly JGB purchases at current levels. However, the stronger than expected Japanese industrial output, which came in at 1.6% m/m, gives hope that the Japanese manufacturing activity might have reached the bottom. The Nikkei surged on the positive news causing corresponding Yen weakness. The RBNZ cut its Official Cash Rate by 50bp to 2.50% and a record low today. The RBNZ's accompanying statement was slightly dovish and was focused at dropping long-term rates as well as the currency (which has been appreciating since the last meeting).

Gold longs are back in the game as the worst than expected GDP data and FOMC meeting spark frenzy in risk appetite. The precious metal benefited from assumptions that inflation will return on the back of a weaker dollar and greater demand for raw materials. From a technical perspective we saw 50% retracement in gold back to its weekly (5-Day) high, but subsequently retreated as momentum eased. Nearing the close of yesterday’s session RSI dipped as low as 20.25 signaling a buying point for gold bulls looking to get back in. The commentary following the Fed meeting noted that although the US economy continues to deteriorate in terms of growth, the pace by which the weakening is occurring may have slowed. The statement by the Fed supported the move in favor of positive risk sentiment and carried the rally throughout the US session in higher-yielding assets. The break we needed in bond buying was granted, and opened capital flow into alternatives including gold. As we noted before, gold at or above $900oz implies buying to hedge inflation.