World markets continued their slide as negative risk sentiment continued to drive the markets lower. After what seemed like a positive start to the week for currencies, we saw sharp selling across the board as investors poured into safer yielding assets. Against the Dollar, we saw the Euro make a low of 1.3585 (shedding close to 1.42%), the GBP lost 2.08% to trade below 1.56 for the first time since May 2009, while the Yen lost close to 1.11%.
By Peter Rosenstreich, Chief Market Analyst, ACM Geneva
Crude was trading lower at 71 levels and precious metals came under pressure as a wave of short selling took Gold to 1,044 per ounce on the back of a strong Dollar. The continued erosion of risk appetite seen in the market place is a result of the developments (or lack of) regarding the deficits of the PIGS (Portugal, Ireland, Greece and Spain). The health of these economies has cast a huge shadow over the global market and its effects are reverberating throughout world equity, commodities and currency markets.
This past week we had several macroeconomic fundamental landmines; with four central bank rate decisions from the Reserve Bank of Australia, Norges Bank, the European Central Bank and the Bank of England, and the all important Non Farm Payrolls number from the US.
Reserve Bank of Australia rate decision
On the rate decisions side, there weren't any changes from the Euro Zone or the BoE, but the most interesting and market moving was the RBA. Markets were largely expecting that the Australian central bank would raise the cash rate 25bp to 4.00%; instead, the RBA stunned the market by holding their cash rate steady at 3.75%.
AUD immediately collapsed, as traders anticipated eroding yield spreads would hamper the currency going forward. AUD/USD shed nearly one and a half big figures, trading from 0.8927 to 0.8780. The RBA mentioned persistent concerns over global credit conditions, the strong AUD, growing sovereign credit risk and China's probable tightening as reasons for the temporary pause.
The central bank also wanted to monitor the effect of the last three hikes, as information was still "limited". Deputy Governor Battellino stated in December that "since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being." The fact that so many bright, well-trained analysts completely misread the central bank's intentions highlights the fact that monetary policy is far from being certain.
Furthermore, the economic data in Australia, including an unemployment rate that was peaking at 6%, will remain constructive, while inflation is running above its 2%-3% inflation target band. Given our expectations explained above, we believe the RBA will be forced to raise rates by 25bp in March and end 2010 around 5.25%, which means the AUD sell-off was merely a knee-jerk reaction and the AUD should be well supported moving forward.
US Non-Farm payrolls
The US non-farm payrolls showed a loss of twenty thousand jobs (versus expectations of a gain of fifteen thousand jobs), but reported a lower unemployment rate at 9.7% (versus expectations of 10.0%). On balance, the jobs number was largely digested as negative as investors poured back into less riskier assets upon release and the theme of eroding risk sentiment continued, but the reaction was not as pronounced or severe as expected given the utter collapse in risk sentiment seen the day before.
Looking forward to this week, we can expect continued Dollar strength until we get a clearer picture from the Euro Zone regarding the financial condition of the PIGS. Some other data from Europe which might ease the pressure off the Euro include the German CPI number due on Tuesday, the NIER GDP number and the BoE quarterly inflation report from the UK, the jobs number from Australia on Thursday, and the important Euro Zone GDP number on Friday. A stronger GDP number from Euro Zone could be the catalyst to reverse this bearish trend experienced in the past several weeks.
