Plunge in risk sentiment lifts USD
Risk sentiment improved slightly in Asia following sharp risk-off trading session overnight. The explosions reported in Boston added to the stronger USD move which had been initially driven by the plunge in commodities prices. In particular, the sharp sell-off in gold (down by 9% on Monday following a 5% drop on Friday) has boosted the USD while gold consolidated in Asian session today. Not surprisingly, commodity currencies AUD, NZD and CAD were the largest decliners, in line with their historically high correlation to gold (50%-55% daily correlation over the past 3 years). The move in gold appears to be to a large extent driven by the self-reinforcing unwinding of long positions rather than a coherent fundamental story. Meanwhile, a weaker US Empire manufacturing/NAHB housing data have added to the Q1 GDP disappointment from China. These corrective moves have the potential to persist early in the week as we do not foresee much help from economic data – Germany’s ZEW economic sentiment survey, which is sensitive to financial market variables, should reflect weaker equity markets by slipping to 41. Our economists also forecast a weaker reading on US housing starts today. However, we do not believe the moves in commodity prices are shifting the fundamentally pro-risk outlook supported by accelerating Japanese and on-going US monetary expansions. Thus we see current pullback as a buying opportunity and expect weakness in the funding currencies (JPY and USD) to be reinstated over the coming sessions.
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BNP Paribas