As markets enter the year of the Tiger a somewhat calmer tone appears to be ensuing, with risk appetite edging higher helping equities and the beleaguered EUR to recover some lost ground. US stocks were helped by a firmer than expected reading for the Empire manufacturing survey (to 24.91 in Feb) and a slight uptick in the US NAHB (National Association of Home Builders) index (to 17 in Feb) but consumer confidence remained weak as indicated by the decline in the weekly reading of ABC Consumer Confidence (-49).
On the other side of the pond the better than expected February ZEW survey (a survey of investor confidence) in Germany (45.1) helped sentiment although it still recorded a decline from the previous month as Greek fiscal/debt concerns weighed on financial market participants’ confidence. The bigger impetus came from comments by Greek Finance Minister Papaconstantinou who said there would be no need to for a bailout of the country.
Tensions over Greece eased further following news that tax collectors in the country called off a planned strike, helping to allay some concerns that unions will block planned spending cuts. On the policy front, the EU Council ratified Greece’s plans but with strings attached, giving the country one month to present a report on the timetable for implementing budget cuts for 2010 and three months to outline policy measures required to cut the deficit below 3% by 2012.
Meanwhile, commodity prices have pushed higher helping currencies such as the AUD and NZD to strengthen. Moreover, the AUD was boosted by more hawkish interest rate expectations following the release of the minutes of the latest RBA policy meeting which indicated that the Reserve Bank was merely pausing in its rate cycle. Expectations of a rate hike in March increased as a result.
Overall, the recent rally in the USD is looking increasingly overdone and some reversal is likely over coming weeks. The fact that market positioning has reached extreme levels in particular in the case of the EUR highlights scope for some recovery in the currency, especially now that the worst case scenario of a Greek default has passed. The outlook for commodity currencies is even more bullish as risk appetite improves further.
If anything, data today is likely to give further support to the recovery story, with US industrial production and housing starts expected to post healthy gains. The Fed FOMC minutes may offer some additional insight into the debate over the implementation of exit strategies but there is unlikely to be much elaboration from the recent comments by Fed Chairman Bernanke in his speech to the US Senate in which he hinted that a rise in the discount rate is not far off.
Risk currencies including many Asian currencies are likely to benefit from the improvement in risk appetite over the short term. EUR/USD will likely strengthen as more short positions are covered but will face strong technical resistance around 1.3839. Asian currencies have been resilient to the recent rise in risk aversion and this is likely to continue over the coming weeks. As risk appetite recovers currency plays including long AUD/JPY , and even some further upside in EUR/USD look favourable.