Talking Points

  • Japanese Yen: Strengthens On Risk Aversion Flows
  • Pound: Mortgage Approvals Increase
  • Euro: Lower in Higher German Unemployment
  • US Dollar: GDP On Tap

Euro Extends Losses On Risk Aversion And Falling Inflation

The Euro extended its losses from yesterday falling to as low as 1.2833, as the single currency would lose ground against the dollar and yen as risk aversion picked up due to weaker than expected U.S. data. European fundamentals added to the bearish sentiment as unemployment rose for a fifth straight month to 8.0% from 7.9% in November. Meanwhile, the CPI estimate fell well below expectations of 1.4% printing at 1.1%, as inflation remains below the ECB 2% target.

Although we have been getting mixed signals from the central bank on whether they will pause their easing policy in February, expectations are that they will cut rates again in the next two months by at least 25 bps. The MPC's price stability mandate may force their hand as falling inflation increases the risk of deflation in the region. President Trichet has consistently maintained that deflation isn't a concern as he expects prices rise in the second half of the year. This may keep the ECB from cutting rates near zero but further easing is very likely and the lower interest rate expectations may be a weighing factor on the Euro. However, a pick up in risk appetite could spark bullish sentiment as the single currency currently has the third highest yield among the majors.

The British pound continues to find support despite expectations that the BoE will cut its benchmark rate by 50 bps next week. The sterling would reach as high as 1.4350 overnight before meeting resistance and falling back below 1.2750. Yesterday Chancellor Darling authorized the central bank to set up an a £ 50 billion asset repurchase fund in order to lift money markets. The central bank now has the ability to employ quantitative easing and can now purchase bonds and commercial paper in an effort to improve credit conditions. Today we saw that there has been a slight increase in credit as mortgage approvals rose to 31,000 from 27,000 in December. Despite the improvement conditions remain tight and with the GFK consumer confidence reading falling to -37 from -35-the lowest since July- the U.K. economy may continue to contract. Therefore, we may see the pound weaken, as we get closer to the rate decision, a key level to watch is the 20-day SMA at 1,4984. Another failed attempt to break above the technical level could lead to a sharp reversal.

The U.S. GDP figures due it today are expected to show that the economy contracted by 5.5% in the 4Q, which would be the most since 1982. A deeper than expected contraction will add to the current sentiment that the U.S. economy may not see growth until 2010.The dismal durable goods orders and unemployment figures yesterday have sparked yet another bout of risk aversion and confirmation of a deepening recession may add to that sentiment. However, a better than expected print may lead to a risk reversal and dollar weakness. Additionally, since the growth numbers are backward looking traders may not put as much stock in them as the expectations that the forthcoming stimulus plan will lead to growth returning in 2009.