Australian Dollar Rises Despite Unwinding of Carry Trade

When two weeks ago the Royal Bank of Australia (RBA) cut interest rates, one would have expected the Australian Dollar to suffer proportionately. Instead, the currency continued its steady upward rise, and touched a six-month high, before falling back slightly. One surprised analyst lamented, “These types of inconsistencies can make trading forex difficult or down right frustrating at times.”

British Pound Rises as Real Estate Market Improves?

The British Pound recently touched a 3-month high against the US Dollar, and market players are betting the currency’s run will continue: “Traders are paying a 0.25 percentage-point premium for one- week call options on the pound relative to puts, according to data compiled by Bloomberg.” In other words, more investors believe the Pound will rise than believe it will fall.

Is the Bear Market Rally Temporary?

The stock market rally that has unfolded over the last month is nothing short of incredible; stocks have now risen 25% since bottoming on March 9. Unsurprisingly, the rally has been deeply intertwined with an ebb in volatility. “The VIX, which measures options trading sentiment on the S&P 500 Index has crashed from a high of 80.86 to 38.85 ahead of Thursday’s trading, a 52% decline.” [Chart below courtesy of DailyFX]

China is Still Not a Currency Manipulator

There was tremendous speculation surrounding today’s release of the US Treasury’s semi-annual report to Congress on exchange rates. Considering that Treasury Secretary Geithner accused China unequivocally of currency manipulation during his confirmation hearing in January, it would seem that an official condemnation was inevitable.

Last week marked the beginning of earnings season, as corporations release the results from the first quarter of 2009. The season got off to a strong start with financial heayweights Goldman Sachs and Wells Fargo both smashing analysts’ expectations with large profits. Over the next few weeks, most listed companies will report earnings, which could collectively set the pace for financial markets for the next couple months. “Markets will continue to watch the corporate earnings data very closely in the short term with company comments on prospects also very important for sentiment with any optimism liable to curb defensive dollar demand.”

Emerging Market Currencies Receive Boost from IMF

Only two months ago, the Wall Street Journal published an article under the headline “Slowdown hits Emerging Markets.” Buttressed with economic data and testimony from economists, the piece underscored the notion that “The global downdraft is hitting the world’s emerging economies with a speed and ferocity few imagined possible.” On Monday, the same newspaper published an article entitled “Emerging Markets Go on a Tear,” exploring how emerging markets have outperformed in 2009.

Yen Continues to Drop Despite Government Stimulus Plan

This week, the Yen continued its decline against the Dollar and Euro, dipping well below 100 Yen/Dollar en route to a six-month low. Most analysts attribute this trend to a pickup in risk aversion: “Some kind of optimism is returning to the market and that’s putting pressure on the yen,” explained one analyst succinctly.
An ongoing rally in stocks and commodities is reinforcing investor attitudes that the economic recession is under control, and is stimulating risk-taking. In other words, the same forces that contributed to the