Investors found solace by shining the torchlight into dark recesses around the world. Overnight and on the back of some admittedly welcome economic data releases, the world looked like a less gloomy place. The impact in currency markets has lessened demand for the solace of safer pastures while encouraging dollar sales in order to fund entry into riskier propositions in the hope that a snapback in risk appetite might be in order after several weeks of a solid downdraft. The Swiss franc and yen both weakened but the greenback suffered worse raising the stakes for the Bank of Japan after the relief rally still showed increasing tensions in the dollar-yen pair.
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Japanese yen – An early and sharp rebound for U.S. stocks fizzled into the opening bell on Wall Street. But the generally better tone showed just how optimism can be quickly revived after the latest batch of data showed that the second wave of bad news isn’t nearly as bad as some investors were braced for. Now might prove to be a prescient moment for the Bank of Japan to take action just as investors frightened by their own shadows find the room a little better illuminated. Stocks rose in Asia with the MSCI Asia Pacific index gaining for the first time in four days. Finance Minister Noda reiterated that the yen’s gains would harm the economy but said he was examining the impact of speculative bets on the yen as part of his process. The yen strengthened to ¥76.50 overnight and has given back very little as enthusiasm for stocks resumes as dealers are reportedly using the dollar to sell short in order to place risker bets around the world in so-called higher-yielders.
U.S. Dollar – The dollar index recovered sharply. In early trade S&P index futures advanced by almost 2% inspiring dollar sales in order to put capital to better work outside of the U.S. However, as the inverse correlation between stocks and the dollar’s performance was pretty evident as stocks came back down to earth with a bump. Monday’s story was dominated by firming expectations for Bernanke’s Fed to come to the rescue by the weekend. Some onlookers are already turning pessimistic over the potential for disappointment. Don’t forget, last year the hint was heavy enough but the time lag was substantial given that the FOMC didn’t convene again until late October. And with the impact of quantitative easing less than completely understood, investors may well have less reason to jump for joy if Mr. Bernanke reiterates the Fed’s pledge to stand by ready and willing to support the economy through a new round of asset purchases.