USD bounces back–Are risk appetites set to worsen?

* USD bounces back–Are risk appetites set to worsen?
* G20 and SDR talk is just noise
* ECB meeting next week a likely catalyst for more EUR weakness
* Key data and events to watch next week

One week after the USD plunged against other major currencies, the greenback has come bouncing back. The reversal stems from many reasons, but the keys to watch are: 1) Fears over USD devaluation stemming from the Fed’s buying of Treasuries were allayed by solid investor demand for bio of new Treasury issues spanning the 2,5, and 7 year terms. Contrast that with a failed UK auction (demand was less than the amount offered) of only about GBP 1.7 bio in 40-year bonds. 2) Outlooks elsewhere worsened further: Eurozone industrial new orders plunged to a YoY decline of -34.1%. And that was January data. Do you think orders picked up in Feb. or March? Not bloody likely. The March Swiss KOF leading indicator fell to -1.79, a new low in the current downturn. UK retail sales slumped -1.9% MoM in Feb. after a slight improvement in Jan. In Japan, retail trade in Feb. dropped further to -5.8% YoY from -2.4% in January. 3) Anticipated ECB rate cut next week and potential moves to quantitative easing (more below). 4) Greater detail from the US Treasury on plans to entice private capital to take on toxic bank assets. This is still a work in progress and we’ll need to see if the buyers and sellers are able to find satisfactory price levels to engage, but it dissipated a negative hanging over the USD. 5) Lack of follow-through–much of the week was spent testing the USD downside, with some notable action following ill-considered comments from Tsy. Sec. Geithner on the USD reserve role, but the lows established last week held firmly and USD sellers eventually threw in the towel. Full text »