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Market Commentary

Market Commentary: (Updated: Friday, January 22, 2010)

As the global recovery continues to slowly progress, the US dollar will once again take on an overall weakening tendency against its major-currency peer group after a strong yet brief recovery period. The temporary lift felt by the USD during December is now facing increasingly strong resistance to continue as investors relentlessly pursue higher yields found in riskier assets classes.

Global commodity markets maintained momentum coming into the new year as currencies such as the Canadian dollar, New Zealand dollar, and South African rand continue to benefit from favorable movements in the commodity market. Aside from strong crude oil and copper prices, the CAD is also supported by strengthening economic fundamentals and one of the strongest financial sectors in the world. In the UK, the Bank of England’s decision to keep rates steady at 0.5 percent earlier this month was widely expected. The central bank also vowed to maintain a level of interest rates that is broadly supportive of economic recovery, particularly in view of the weak fiscal outlook.

In the eurozone, sentiment turned sharply against EUR in December, due in part to the release of strong US economic indicators and the surfacing of Greece’s sovereign issues. As the fiscal crisis in several eurozone countries is raising investors’ concern over countries with deteriorating fiscal situations, currency markets will likely incorporate a high degree of risk aversion into economies with eroding public debt environments. Recent inflation data reported by the European Central Bank does not support an acceleration of the withdrawal of monetary stimulus any time in the near future.

In Japan, yen lost a staggering 7 percent against the dollar in December as announcements regarding new policy measures by the Bank of Japan were made. Fresh liquidity measures to combat deflation and keep short-term interest rates low prompted investors to sell the Japanese currency, while the possibility of intervention through dollar purchasing by the Bank of Japan became a more distinct possibility; both of which will weigh heavily on JPY in the coming months.

The new year began and will likely continue with increased, yet cautious, optimism regarding the global economic recovery, sustained strength in commodity markets, growing debate over the timing of stimulus withdrawal, and rising concerns over sovereign debt in the more advanced economies.

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