Forex Market Update: Nationalization Of Banks Back On The Agenda As The weekend Approaches, Risk Scaled Back
- US Jan PPI at +0.8%, Ex Food/Energy +0.4% vs +0.3% and +0.1% expected resp.
- US Weekly Initial Claims at 627k vs 620k expected
- US Jan Philadelphia Fed Index at -41.3 vs -24.1 exp and -24.3 prior
- US Feb Leading Indicators at +0.4% vs flat forecast, +0.2% prior
THEMES TO WATCH - UPCOMING SESSION
- France Business Confidence Index (0745)
- France CPI (0745)
- France Flash PMI data (0800)
- GE Flash PMI data (0830)
- EU Flash PMI data (0900)
- UK Retail Sales (0930)
- Canada CPI (1200)
- US CPI (1200)
In his semi-annual testimony before parliament, RBA Governor Stevens produced a more upbeat assessment of the Australian economy than the market had been expecting. While noting that the near-term outlook and sentiment remained fragile, he saw no reason for the current downturn to be a deep and sustained one. He added that the aggressive rate-cutting stance adopted by the central bank, combined with the weaker AUD and fiscal stimulus, should put the Australian economy on a much firmer footing than others. He admitted that China looks to hold the key to Australia's recovery and was seeing a tentative recovery in the Asian leader. Overall, the market inferred that further deep rate cuts may now be off the agenda and the chances of a greater than 50bp rate cut at the March meeting diminishing. AUDUSD firmed after the report, but an overly-long market chased stops later and headed lower during the rest of the session.
The EUR grabbed the spotlight in Asia again this morning, giving back some of the gains made yesterday on the back of Germany's assurance that it would display its 'ability to act' when the stability of the Euro-zone was questioned. This time it was the turn of ECB member Liikanen who commented that as long as price stability was not endangered, other policy goals could be supported. He added that the ECB would not rule out any policy measures to fight the economic slowdown and they must be prepared to act in even worse economic conditions than those that exist at the moment. He noted that the ECB had already adopted some non-traditional monetary policy measures, in buying bonds and short-term commercial paper for cash, and these had proved effective.
As the markets are constantly bombarded these days with talk of bank bailouts and failures, renowned NYU professor Nouriel Roubini, the so-called Dr Doom due to his long-standing bearish stance on the global economy, has taken things one step further by suggesting there is a risk of a sovereign bank failure. He notes that the process of socializing the losses from the private sector has already moved many liabilities onto the books of the sovereign. Without being specific, he cautioned that at some stage a sovereign bank may crack and then the ability of governments to act to preserve the global financial system could come unglued. At the same time he suggested that there was a 30% chance of an L-shaped depression without 'appropriate and aggressive policy action' by the US and others to prevent a sovereign bank failure.
A voice from the past - former Japanese Vice Finance Minister for International Affairs Eisuke Sakakibara, affectionately dubbed as 'Mr Yen' - commented that USDJPY could rise as high as 100 as the Japanese economy approaches a state of depression and recent scandals continue to douse any faith external investors may have had in the local political system. His comments come as the markets push to decouple the JPY from the perceived 'safe-haven' status that had been in place since the start of the crisis.
Asian markets were awash with rumours that BOA/Citibank were about to be nationalized at the weekend, sparked by an article in the FT. Asian bourses and US stock futures were sold off in unison and risk aversion reared its head during the post-lunch session, with JPY crosses under pressure but USDJPY continued to hold the 94.0 mark as the greenback continued to rule. The Korean won was under pressure from the bell, USDKRW rising to a 3-month high of 1,507 as onshore players reacted to BOK data showing debt levels were rising.