WEEKLY NEWS LETTER: Correlation between Global equity performance and US Dollar begins to fade

[RTFX-Trading]

[B][I][U]WEEKLY NEWS LETTER: [/U][/I][/B]Correlation between Global equity performance and US Dollar begins to fade

The US Dollar continues to be the best performer, now boasting 3 consecutive weeks of appreciation against the Euro. The greenback rallied on the back of a positively surprising US Q4 GDP result at the back end of last week. The familiar global recession and recovery correlations which accompanied us in the most part of last year, now seem to be fading away and global equity performance no longer seem tied to the US Dollar. The market is now considering taking long positions in both the US Dollar and US equities. Although many problems within the global economy remain, these problems appear to be shifting away from the United States to the overseas market.

Last week we also had the FOMC meeting with the Federal Reserve sounding decisively more hawkish than expected. The FED warned of an impending shift in monetary policy which favors a more tight policy going forward. However although a rate hike in the US is not expected in the next couple of FOMC meetings, investors are beginning to price in a reversal in FED monetary policy.

Meanwhile the fundamental pressure continues to weigh on the Euro. In the past months the heavy flowing capital away from the US Dollar was compensating for the European currency’s shortfalls. However, since the US Dollar is finding its ground, the Euro is being left to fend for its own. The situation of Greece’s budget deficit continues to be a burden on the single currency. The Greek Finance Minister has repeatedly assured the market that the necessary steps to reduce the deficit are being taken, and they said they were not seeking a bailout from the European Union nor are trying to sell debt to countries like China. However, the EU repeatedly warned Greece that they are not doing enough to bring the deficit within the limit in the required time frame. Meanwhile, recent comments from the EU Economic and Monetary Affairs Commissioner Almunia that there is no “plan B” for Greece, and that “in the euro area, default does not exist” gave reason for more concern. The most troubling news is that Greece does not appear to be alone in this crisis, as Ireland, Portugal, Spain, Italy and others are starting to feel the pain.

Earlier in the week, positive a stronger PMI release from the UK was offset by disappointing mortgage approvals and softer money supply. The mixed data weighed on the Sterling, resulting in EUR/GBP continuing to go higher from the low reached last Thursday at 0.8602 and back to below 1.6000 against the US Dollar. Recent warnings that the UK could soon follow in Greece’s footsteps have applied considerable pressure on the Pound. The market will be looking at the Bank of England’s MPC meeting today. While the BOE is expected to leave rates and Asset Purchases unchanged at 0.50% and £200 Billion respectively, the main focus will be on the BOE’s policy statement. With last month’s indications that they would likely wait until February to consider any changes to the Asset Purchases Program, the market is now betting that the BOE will likely end the program altogether. If this is the case, the British Pound will likely post significant gains, while it may suffer significant losses if the BOE suggests that they might add to the program later on in the year.

Elsewhere, in China, the topic of diversification has once again surfaced. Central bank adviser Fan encouraged diversification but also denied any direct knowledge of a potential investment in Greek bonds. Carry trades have come under some more pressure on Monday, with calls for a crackdown on this type of trading from UK Lord Turner generating concern. Lord Turner has said that carry trades serve little or no useful social or wider economic purpose. Finally, traders should watch out for some more weakness in the Swiss Franc after a local justice minister warned that UBS could collapse if talks with the US over a tax fraud investigation fall through.

[B][I][U]FX Technical Key points:[/U][/I][/B] EUR/USD is bearish, target 1.3750, key reversal point 1.4800. USD/JPY is bullish, target 98, key reversal point 85. GBP/USD is bearish, target 1.5050, key reversal point 1.7000. USD/CHF is bullish, target 1.1000, key reversal point 0.9950. AUD/USD is bearish, target 0.7800, key reversal point 0.9400. NZDUSD is bearish, target 0.6200, key reversal point 0.7650.

Emman Xuereb
Trading Desk
RTFX Ltd
The Cornerstone Complex, 16th September Square | Mosta MST 1180 | Malta
Tel: +356 23 31 00 00
Fax: +356 21 41 24 58
Web: [url]www.rtfx.com[/url]
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