Risk On: Bank of America News Helps Currencies

The theme in the markets this morning is a return of risk appetite. The US government has bailed out Bank of America for the second time, reminding investors that they are still here and ready to help the banking sector. BoA received another $20B to ease their absorption of Merrill Lynch. So far, they have received $138B in government aid even though their market cap is only approximately $50B. The additional funds provided to BoA is the only reason why the dollar is rallying against the Japanese Yen and why we are seeing a recovery in all of the higher yielding pairs such as the EUR/USD and GBP/USD.

As for this morning’s economic data, consumer prices continued to fall, foreign demand of dollar denominated investments was the weakest since September 2007 and industrial production fell for the fourth time in five months. The overwhelmingly dollar bearish news only had a limited impact on the dollar because much of the bad news has already been baked in. Most people are expecting a weak set of economic data this month. The bigger surprises will come from earnings which is why we are keeping a close eye on equities.

A Closer Look at the Data

Taking a look at the data in more detail, headline consumer prices dropped 0.7 percent last month while core prices held steady. The annualized pace of CPI growth slowed to 0.1 percent. This is smallest increase in consumer prices that we have seen in 54 years. Discounts on clothing and lower gasoline prices have driven inflation lower. For the Federal Reserve, this will support their plans to keep interest rates at ultra low levels for at least the next 6 months. In terms of the Treasury International Capital flow report, net long term flows declined by $21.7B. The numbers show that China is still buying US assets, but at an increasingly slower pace. Japan was a net seller but in general, we saw a large exodus out of all debt instruments including treasuries, corporate and agency bonds. Clearly the dollar’s low yield is turning foreign investors away. The manufacturing sector still has its problems as indicated by the 2 percent decline in industrial production. The US economy and will remain weak but what is mattering these days is risk appetite.

About Kathy Lien 235 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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