USD fell heavily overnight
08/09/09 16:07
Chris
Lori Workshop
LA Nov 13-15
This workshop is contingent upon interest before Oct 4 deadline, see details
The USD fell heavily overnight against every other G10 currency pressured, at least in part, by the continued advance of equity markets both in Europe and in Asia. The EURUSD-equities relationship had appeared to weaken over recent weeks, but has now firmly re-established itself. In the short term the dollar faces significant downside risks inspired by funding ccy attraction as indicated in this Bloomberg article.
Resurgent equities continue to defy expectations of their imminent decline. Overnight, ECB Executive Board Member Gonzalez Paramo felt compelled to caution that markets might be reacting over-optimistically to improved economic data, and pointed out that recent economic growth is not necessarily sustainable. I feel the market is grasping at hope and almost willing equities higher to deny previous errors and omissions they must face on some dark day. They must also hope that the CB's continue to cover the trillions of dollars on "at risk" derivatives set to implode. They can cover their sins for months and years, so we will work to remain connected to current sentiment.
LA Nov 13-15
This workshop is contingent upon interest before Oct 4 deadline, see details
The USD fell heavily overnight against every other G10 currency pressured, at least in part, by the continued advance of equity markets both in Europe and in Asia. The EURUSD-equities relationship had appeared to weaken over recent weeks, but has now firmly re-established itself. In the short term the dollar faces significant downside risks inspired by funding ccy attraction as indicated in this Bloomberg article.
Resurgent equities continue to defy expectations of their imminent decline. Overnight, ECB Executive Board Member Gonzalez Paramo felt compelled to caution that markets might be reacting over-optimistically to improved economic data, and pointed out that recent economic growth is not necessarily sustainable. I feel the market is grasping at hope and almost willing equities higher to deny previous errors and omissions they must face on some dark day. They must also hope that the CB's continue to cover the trillions of dollars on "at risk" derivatives set to implode. They can cover their sins for months and years, so we will work to remain connected to current sentiment.
Widespread predictions that the month of September would herald a sell-off in stocks have also so far come to nought, which can be expected, as we discussed in Pro Traders Club. I had pointed out that the more the market anticipates a pullback/risk aversion in September, then the less likely it is to occur. This is not entirely surprising. Although it is historically true that stock returns are generally weaker in September than in any other month of the year, September returns on the S&P500 have managed to stay positive for 33 of the last 76 years (Chart 1). Like who cares about anything other than what is happening today.
But stronger equities cannot be the full story. Gold prices too pushed higher breaking above the $1000/oz barrier for the first time since late February. However, compared to conditions in Q1, the global economy is in a much better state and most indicators of risk appetite remain firm - our UBS FX Risk Index currently stands at -0.89 which constitutes strong risk-seeking sentiment in asset markets. Inflation expectations also seem subdued at this stage with 5y-5y forward breakevens having fallen significantly from their August peak (Chart 2). The surge in gold prices is also hard to reconcile with the recent decline in crude oil prices, which have tracked (US) inflation expectations better over the past few weeks.
This points to a dollar-specific scenario driven largely by external factors. Reports have once again pointed to purchases from China, either as a sovereign investor or in the form of retail demand, as one of the key drivers behind the recent move. Even though de-dollarisation has not been a major theme within China in recent months as the government grapples with domestic problems, accumulating gold as a sovereign asset has been a position of SAFE, though the reserve manager remains wary of moving market prices too aggressively.
Source: Bloomberg, UBS, Chris Lori