Risk assets rally, dollar sells off on better than expected US macro news

Tom Tong17/Oct/2011Currency Updates

USD

Equities and commodities closed the week sharply higher, encouraged by the better than expected macroeconomic news flow out of the United States. Investors took comfort in the fact that hard economic data in the US and Europe appear to be coming in somewhat better than the gloomy consumer and business sentiments had indicated. The promise of action from European officials over the next two weeks to solve the twin peripheral and banking crises has assuaged markets for now, although peripheral spreads did not join the rally and closed the week somewhat wider. In FX, massively long positioning on the dollar is taking its toll on the greenback, which gave significant ground last week against most currencies.

GBP

We closed a relatively quiet week in the UK last week. The two most important releases of the week, manufacturing production and unemployment, surprised slightly in opposite directions, manufacturing coming above expectations, and unemployment rising unexpectedly to 8.1%. With little new information on the Bank of England perceptions of the risk of a double dip recession, Sterling went back to form and traded as a low-beta version of the Euro, rising 1.5% against the dollar but dropping 2% against the common currency.

EUR

After recalcitrant Slovakia finally agreed to approve the EFSF amendments, the bailout facility is now over its last political hurdle. Focus switches squarely on the upcoming summit on October 23rd. For a change, both Germany and France have allowed expectations to rise: markets now fully price in some sort of leveraging mechanism that will increase the EFSF financial firepower to at least 2 trillion Euros; a reduction in Greece’s debt burden to a realistic amount that can actually be serviced by the Greek economy; and a credible plan to recapitalize European banks. The market’s optimism about this meeting is somewhat schizophrenic however; while the Euro rallied massively against the dollar (up over 3.5% for the week) peripheral sovereign spreads actually widened.

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Written by Tom Tong

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