Pendulum again swings towards risk appetite

Pendulum again swings towards risk appetite

Yesterday and overnight we have experienced a broad sell off in the USD as a return to global risk appetite kicked in. GBP/USD is approaching the 1.50 level again after a good start to trading and EUR/USD has tested the 1.3350 resistance level this morning. Last night we had the FOMC decision and as expected interest rates remained unchanged at 0.00- 0.25% and the statement commented that rates will remain low for “an extended period”.

Furthermore the Fed stuck to their guns following the March announcement that they will still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

On the upside the fed noted that the “pace of contraction appears to be somewhat slower” which allies with the surprising surge in US consumer confidence and there was also signs that the market was beginning to repair itself outside of intervention. Before we get carried away and start talking of an imminent recovery we must remember yesterday’s severe Q1 GDP data from the US which showed a whopping 6.1% contraction against a forecast of a 4.7% drop.

A similar theme in euro zone yesterday as we again saw improved confidence data against a downgrading of German GDP to -6.0% vs. -2.25% originally forecast. The euro is trading higher however as sentiment and focus on the improved confidence data helped the currency. We also need to remember that the euro interest rates are higher than the UK, US and Japan and the increased risk sentiment into yield will help the euro.

We can see similar gains when looking at other higher yielding currencies such as the AUD and ZAR which have all posted gains– particularly impressive is the ZAR- the USD against the ZAR has weakened from levels over 10 recently to 8.5 currently.

In other news we saw an interest rate cut of 50 basis points in New Zealand to 2.50% after further weak data from their economy. The RBNZ anticipated that the “adverse economic forces generated by the crisis to remain dominant throughout 2009,” with the “timing and extent of recovery” remaining “highly uncertain.” So expect further weakness for the Kiwi dollar…

This morning we saw Nationwide House Prices resume their decline in April after rising unexpectedly in March. However the decline of 0.4% was less than expected and fuels optimism that a bottom is near…or is this another false dawn!

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