One knows when things aren’t quite right when a football team wins a game by using a hand to help score a goal rather than a foot. In this case it was French striker Thierry Henry who helped France to qualify for the world cup at the expense of Ireland. To English soccer fans this looks like decidedly similar situation to the “hand of god” goal scored by Diego Maradona during the 1986 World Cup.
Similarly things don’t look quite right with markets at present and what began as a loss of momentum turned into a bit of a rout for US (Thursday) and Asian stocks (Friday). In turn risk appetite has taken a turn for the worse whilst the USD is on a firmer footing. Profit taking or simply repatriation at year end may explain some of the market moves but doubts about the pace and magnitude of economic recovery are playing a key role.
Ireland has called for a replay of the soccer game but markets may not get such an opportunity as sentiment sours into year end. Markets chose to ignore some relatively positive news in the form a stronger than forecast increase in the Philly Fed manufacturing survey and the improving trend in US jobless claims leaving little else to support confidence.
The only event of note today was the Bank of Japan policy decision. Interest rates were kept unchanged at 0.1%. Given that official concerns about deflation are intensifying interest rates are unlikely to go up for a long while and we only look for the first rate hike to take place in Q2 2011. The BoJ may however, be tempted to buy more government bonds in the future if deflation concerns increase further. USD/JPY was unmoved on the decision, with the currency pair continuing to gyrate around the 89.00 level though higher risk aversion suggests a firmer JPY bias.
In the short term increased risk aversion will play positively for the USD against most currencies, especially against high beta currencies such as the AUD, NZD and GBP. Asian currencies will also be on the back foot due to profit taking on the multi-month gains in these currencies.