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The recent improvement in market sentiment, regarding the global prospects, has been highlighted more in asset prices than firm economic data. A reasonable phenomenon, given the backward looking nature of economic data. However, it seems markets have gotten slightly ahead of themselves
once again, in predicting the bottom. Corresponding has been AUD/NZD, that has broken out of its 1.20-1.25 range and threatens further short-term upside. We believe what we are seeing in the FX markets is a moderating of expectations. While the US and global data has surprised to the upside, we believe it’s to early to call the recovery. Sooner or later asset prices will need to adjust to the more cautioned forecasts. Much of this optimism has been based on the revival of EM, specifically from Asian countries. However, expectations came down as China’s Q1 GDP came in lower than expected at 6.1% vs. 6.2% exp. Yet, the acceleration in fixed asset investment was very encouraging and should push 2009 GDP to 7.0%. We expect the recovery in China to continue and for it to be the strongest anywhere in the world but not just yet. In the mid term, stronger growth should support "risky" currencies, especially those in Asia (ie the AUD and NZD in the G10). In Europe, the February’s 2.3% m/m drop in euro-zone industrial production validates that the manufacturing sector is still contracting sharply. With these figures, a 2009 GDP forecast of -3.5% /-4.0% is starting to sound optimistic. Overall, forward looking indicators in Asia and Europe have provided mixed signals at best. Now more than ever, the US will be the economy most traders will be paying attention to. Yesterday’s economic data contained enough encouraging signs to sustain Wall Street as the Empire manufacturing index was particularly strong. Today’s key releases will be weekly jobless claims and March housing starts.
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