Today's Currency Exchange Prediction - Risk Sentiment Worsens

February 10, 2011 - Written by John Cameron

STORY LINK Today's Currency Exchange Prediction - Risk Sentiment Worsens

The benchmark MSCI Asian Index saw losses of 0.8% last night as stock markets reacted to yesterday’s comments by Federal Reserve Chairman Ben Bernanke and some worrying Australian unemployed figures. Initially, last night’s Australian labour figure appeared positive, showing that unemployment had stayed at 5%, whilst 24,000 new jobs were created in January. However, on closer inspection, analysts aired concerns that nearly all of these 24,000 new jobs were part-time positions. The number of full time jobs created was significantly lower than expected, dropping for the first time in three months.

Fed Chairman Ben Bernanke commented yesterday that the US stimulus programme had worked and that if the second tranche of the asset purchase scheme had not been put in place, then US unemployment figures would now be 3 million higher. However, he did suggest that if US inflation started to accelerate then the Fed would consider an early exit of the scheme. Bernanke also commented that levels of unemployment were unlikely to drop for the foreseeable future. This has already caused a dip in risk appetite as evidenced by last night’s sell-off in Asian stocks. A combination of all of the above factors is likely to provide renewed support for the Dollar as the day progresses. The lower opening of the FTSE 100 in London re-enforces the deterioration of risk sentiment, which is likely to put further pressure on the high-yielding Aussie Dollar, Kiwi Dollar and South African Rand.

Meanwhile, in the Eurozone, Axel Weber has dropped out of the running for the ECB President’s job. Weber has been consistently hawkish on inflation and the news that he will not be heading-up Europe’s Central Bank has lessened the likelihood of Eurozone interest rates rising in the near-term. This caused some drift for the Euro in late trading yesterday.
In the UK, today sees the much-anticipated Bank of England Interest Rate Decision for February. The market has factored-in a 15-20% chance of a 25 basis point rise in rates. Anything other than a maintenance of rates at their record-low of 0.5%, along with no increase to the Bank’s current £200Bn asset purchase scheme, will cause volatility. The market also expects that no accompanying statement will be released. If there is an accompanying which suggests at rate hikes in the short term, this would also cause significant strength for the Pound.

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