Risk pendulum swings to ON in fx markets. Report Jan 23By james tweed • Jan 23rd, 2012 • Category: Currency
Significant items this week:
Tues 24th Jan UK – Public sector borrowing
Wed 25th Jan UK – Q4 GDP
US – FOMC Interest rate decision
Thurs 26th Jan UK – CBI retailers survey
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After a couple of directionless weeks, the risk pendulum is starting to swing towards ‘on’. The dollar remains the main refuge when risk is off and so has lost ground as optimism has taken hold. The EMU debt crisis continues to be the main driver of markets, so we have to ask, “is the latest flickering of optimism justified?” In the US the S & P 500 has passed 1300 for the first time since the slump at the end of July. Reassuringly, the solid performance of US equities is still supported by economic fundamental,s with the past week providing anecdotal evidence of hiring in manufacturing, cautious optimism amongst house builders and a very strong flash report from Reuters/University of Michigan on consumer confidence. US jobless claims fell to their lowest levels since April 2008 and inflation is now at 3%, down from 3.4%
The economic fundamentals in Europe are of course much less encouraging and most southern countries are almost certainly already in recession. At the end of last week the S & P downgrades and the breakdown of the ‘haircut’ negotiations in Greece dampened the first flicker of optimism in 2012 that was based on the fact that at least the ECB was doing its best to save the banks. Even the EU bailout fund has had its credit rating downgraded. However, when markets want to be optimistic they are quite happy to rationalise and/or ignore inconvenient facts, however the Italian downgrade threatens more immediate danger as they try to roll their debt by March.
Any smugness in the UK over France’s losing its AAA rating is almost entirely misplaced. It is very possible that the UK will suffer the same fate before the end of the year, albeit not for quite the same reasons. Unemployment is rising and at 8.4% (that’s 2.69 million out of work) is the highest for 16 years. Luckily the private sector is still a net hirer… There is good news in the form of inflation, which is retreating rapidly; falling to 4.2% from 4.8% and that’s before the increase to a 20% vat rate and oil price spikes of a year ago drop out of the calculation.