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DOLLAR: The Dollar has seen narrow and choppy two sided trade overnight. Global equity markets were higher overnight and gold was lower, suggesting a return of investor risk appetite that could diminish the Dollar’s safe haven appeal. But any Dollar weakness from a lack of safe haven support may be limited by the idea that the US is still in the best position to recover first from the global economic recession. In fact, the Dollar may win at the expense of other currencies whose governments are perceived as not doing enough to stem the economic spiral. Bernanke and Obama have pledged that the US government will do everything possible to lift the country out of a recession, and the proactive attempts being made in the US is certainly supportive to the Dollar. In addition, seeing the ECB reluctant to cut aggressively cut rates and the Euro-zone’s banking system risks getting worse could further diminish the appeal of the Euro. Stymied government efforts in Japan to provide an effective stimulus package leaves the country facing a severe and drawn out recession, and this is stripping away the Yen’s status as a safe haven currency. If the US equity market sees some upside traction today, we can’t rule out a dip in the March Dollar back to trendline support at 86.57, but we also get the sense that the Dollar is starting to be viewed in a better light given the US government’s efforts to revive the economy and stabilize the banking sector.
EURO: The Euro has been under a bit of pressure in the early overnight trade, weighed down by more negative economic news from Germany and expectations for the ECB to lower rates next week. While a slightly higher risk tolerance has so far limited overnight losses, we suspect both economic and financial system problems will end up weighing on the currency. The Euro could ultimately be undermined by the 2.1% contraction in Germany’s 4th quarter GDP versus the 3rd quarter and by an ECB member saying the situation in the European banking system remains tense. Therefore, while equity market gains may provide a temporary lift, there seem to be enough problems facing the Euro-zone to suggest that rallies in the Euro won’t hold.
YEN: While the Yen has traded weaker overnight, the aggressive selling seen over the last two session appears to have subsided, and that may allow for a minor price bounce. The market is looking a bit oversold following the sell off over the past two weeks, and some short covering seems reasonable. But the upside potential for the Yen remains limited, and the market is likely headed back toward the 100 price level. It is clear that Japan is facing a severe and protracted recession given recent data showing January exports falling 45.7% compared to year ago. Japan’s worsening recession, ideas that the government has not taken enough steps to stem the economic decline, and the recent political scandals have undermined the Yen’s safe haven appeal. An indication that most of the carry trades have been unwound seems to be another factor weighing on the Yen.
SWISS: The Swiss has seen a choppy two sided trade, but unless broad selling against the dollar emerges, we suspect the market will have trouble sustaining any upside traction. The weak German GDP reading and a sharp decline in Italian retail sales certainly paints a bleak picture of the European economy, and that should ultimately undermine the Swiss currency. We also suspect the uncertainty regarding the issue of Swiss bank secrecy will continue to be a negative factor.
POUND: The Pound is starting to come under some pressure this morning, giving up its earlier gains following a GDP revision indicating that the UK economy contracted at a slightly faster rate in the 4th quarter. The news is seen as paving the way for quantitative easing by the BOE, and that also seen as a bearish factor for the Pound. Part of the Pound’s strength recently has come on the cross trade with the sinking Yen. Therefore, any recovery bounce in the Yen could also add downward pressure on the Pound.
CANADIAN DOLLAR: The Canadian currency is attempting to recover after holding a test of support near 80.00 in the overnight trade. A slight improvement in risk appetites and improved sentiment in global equity markets may help to underpin the currency. The market was able to shake off a weak December retail sales figure yesterday with support for the Canadian coming from the sharp recovery in US equity markets. Gains in oil prices overnight are providing a measure of support, but to fed off ideas of lower Canadian rates ahead, we suspect follow through gains in US equity markets will need to be seen to lift the March Canadian above downtrending channel resistance at 81.03 today.
