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The Dollar is Holding Amid Reappraisals by Central Banks
Market Brief
The dollar bounced back against the yen during the Asian session to 104.50-55 & fell back to 103.40-45 before settling around 103.90-95. Risk aversion and the paring down of the yen cross position remained the main theme that drove traders. This was coupled by heavy losses at AIG and a reappraisal of ratings of some companies by Fitch as well as S&P which pressured the Nikkei.
However, the EUR held fast in face of the last drop which sent it to a low of around 159.00 before staging a recovery to 160.35-40. However, there lacked a follow through and it declined to 159.30-35 before stabilizing in the upper levels of 1590.
ECB President Trichet sounded hawkish to most ears in his press conference following the central bank’s decision to keep rates on hold. However, he did reiterate and insist that the ECB is committed to avoiding second round effects (like when the unions asked for higher wages to face the ever rising petrol prices). We estimate the ECB will achieve this goal and thereby still be on track to cut rates later this year in response to slowing growth.
The dollar’s rally against the Swiss franc rally took a breather in light of the hawkish tone of Trichet. This was taken as an excuse to book some profit even though second tier US data came out above expectations. The dollar fell from 1.0590-95 to 1.0480-85 & closed around 1.0510. A clear direction was missing in Asia as it traded with within the 1.0510-15 1.0460-65 range.
The BoE MPC voted to leave the bank rate on hold at 5.00%, as expected. There was no statement, as normal with an unchanged decision. However on May 14th, the BoE will publish its next quarterly inflation report. That should really highlight the Bank of England considerations of growth, inflation and the state/needs of the lending markets.
GBP/USD was trading in a range bound in Asia within 1.9540-45 to 1.9565-70. Moreover EUR/GBP gravitated towards decent option expiries (0.7810-0.7790) before finding a support around 0.7820-25 and tracking the euro dollar back up to 0.7885-90. It is currently holding on to gains but caved in within 0.7870-75 to 0.7885-90 range in Asia. Finally, the GBPJPY dropped to lows at 202.40-50 before bouncing back up to 204.40-50 but lacked follow through and thereby fell to 202.30-40.
The Royal Bank of Australia quarterly Statement on Monetary Policy lifted underlying inflation forecast for 2008 and has also reassessed growth forecast. It nonetheless sees inflation above the target until the end-2009. Inflation in Q4 for 2008 jumped to 3.5 per cent.
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