A real sense of ‘now-what’ is starting to develop after a rally for commodities, stocks, bonds and currencies (against the dollar) as sentiment took its positive cue from the public-private plans to isolate the mal-performing loans on banks balance sheets. Overnight the Japanese announced a halving in the volume of its exports compared to a year earlier reinforcing the possibility that the recession is weakening. The news compounds other shrinking activity in the region and is at odds with rising Asian currencies driven by pluckier risk appetite. Those currencies have risen to resistance levels, which means we’ll need confirmation of a turn in their domestic data and at least regional data, lest investors are prepared to blindly rely on continued signs of a de-acceleration in the United States.

The dollar has regained its composure one week on from being jettisoned from investors’ portfolios when the FOMC announced a more active level of government debt purchases. Those purchases start today amid some confusion over exactly what maturities the Fed will focus on. After the dust has settled the euro buys $1.3468 this morning following two key pieces of news. Earlier the IFO index of German business confidence fell to a 26-year low indicating a deepening of pessimism across the nation’s manufacturers. At the least it confirms any suspicions that the ECB will indeed lower interest rates soon. At worst, it tells us that the index needs to be renamed from a gauge of optimism to one of pessimism.

But turning U.S. stock index futures from negative to positive was the release of a stronger than anticipated reading of durable goods, which came in positive and confounded predictions of a further decline. According to the data a rebound for machinery, computer goods and defense orders boosted output over the month. Investors are once again keen to jump on signs of a turning point in the recession as their cue to add to a 20% rebound in equity prices. The dollar is once again holding its own despite the plausibility of the view that dollar weakness will be the soupe du jour when recovery becomes apparent thanks to a lower guard against risk aversion.

The Fed will likely try to avoid the footsteps of the Bank of England, where the mandarins are likely red-faced following the flump of an auction of gilts on behalf of the government. The auction of £1.75 billion in 40-year gilts left some of the debt on the table with fewer investors showing up to take all of the available offering. In one sense this is worrisome from the perspective that the government intends to sell £146.4 billion in gilts throughout 2009, but the reality is that this auction was probably too long for most investors. While the yield on the 10-year gilt rose 10 basis points to 3.43% immediately after the news broke, one must remember that the 40-year area of the curve is an extremely risky area to issue debt from the perspective that it’s less than conventional. From that perspective one would think that the Bank might have learned a valuable lesson here. Nevertheless the auction failure helped depress the value of sterling, which lost a penny against the dollar as it fell to $1.4575.

Sentiment is still fragile surrounding the prospects for the British economy. Later this week retail sales and weakening house prices are likely to serve up a fresh local dose of ‘what next?’ Europe’s largest bank by market value, HSBC also forewarned of the potential for up to 1,200 job losses in Britain if it followed through on plans to close administrative, processing and operations departments. For Britain, higher unemployment is most certainly in the cards. Against the euro today the pound has eased back a little meaning one euro buys 92.41 pennies.

Commodity dollars are running out of upside room against the dollar. In order to breach 70 cents against the U.S. dollar on a sustainable basis the Aussie dollar needs more evidence that the American banking plan or that the Chinese economy will spur demand for commodities. It’s crucial to remember that rising commodity prices alone are no recipe for global growth. In fact, rising prices alone could quickly snuff out flickers of recovery and stymie demand. The Aussie today buys 69.85 cents while the Canadian dollar can’t quite seem to hang on to gains despite the fact that crude oil appears comfortable above $50 per barrel. The northern dollar today buys 81.19 U.S. cents.

03-25-2009 09:40 AM EDTCurrent PricePut Open IntWeekly Change in Put Open IntCall Open IntWeekly Change in Call Open IntPut/Call Open Int Ratio30-day Historical Vol (%)Implied Volatility (%)
Euro Euro1.346867,994-41,09019,640-28,4733.517.717.9
Yen Yen97.965059,981-32,67212,250-7,4814.918.317.8
Pound Pound1.457836,900-19,42725,063-3,5111.521.118.1
Canada Canada0.81203,764-8,6549,736-17,9800.417.516.2
Aussie Aussie0.69783,575-32,50710,507-20,8040.324.622.5
Swiss Swiss1.130323,5939,8233,568-8,7906.617.915.6