US DOLLAR: WAITING FOR OBAMA

Kathy Lien (gftforex.com)

With US equity and bond markets closed for Presidents Day, trading was relatively quiet for currencies. The G7 meeting did not lead to any fireworks but the dollar did gap higher against all of the major currencies except for the Japanese Yen at the Asian open on Sunday. Despite the Congressional approval of the $787 billion stimulus package, the US dollar and Japanese Yen have strengthened across the board which indicates that risk aversion dominates. So far, the prospect of the bill being signed by President Obama has not helped the market. The official G7 statement singled out the Chinese Yuan but not the Japanese Yen. The tone towards China was rather conciliatory with the Group of Seven welcoming China’s fiscal stimulus measures and their steps towards a more flexible exchange rate. These comments and lack thereof suggests that the US is trying to play nice after Geithner suggested that China may be branded a currency manipulator. As for Japan, the lack of comments suggest that no is interested in intervening to stop the Yen from rising anything soon. There was no US economic data released this morning, but a number of reports are due for release over the next 24 hours. This includes the Empire State Manufacturing survey, the Treasury International Capital flow report and the NAHB housing market index. All of these are Tier 2 economic data which means that they should not have much of an impact on the US dollar. Instead, all eyes will be on how the market reacts to the official announcement of the Economic Stimulus Bill.

EUR/USD: NEARING 1 MONTH LOWS

Once again, the Euro is attempting to test its 1 month lows against the US dollar. Since there was no Eurozone economic data released this morning and all of the major currency pairs are lower, the weakness of the single currency is purely a reflection of the market’s risk appetite. In contrast to the aggressive monetary policies that we expect from other central banks around the world, European Central Bank member Stark warned against aggressive actions. He said that gradualism is needed in combating the global economic crisis and that aggressive action can lead to more economic uncertainty. He did indicate that interest rates will continue to fall, but his comments suggest that the next rate cut will be no more than 50bp. Compared to the BoE, RBA and RBNZ who cut interest rates by 100 to 150bp clips, the ECB has been very conservative. Only time will tell if their stubbornness will hurt or help them. If inflation skyrockets everywhere except for the Eurozone, the ECB will be vindicated but if their recession lasts much longer than everyone else then Trichet’s credibility will be severely tarnished. The German ZEW survey of analyst sentiment and the Eurozone trade balance are due for release tomorrow. We expect the numbers to be Euro bearish.