NEWS / Foreign Exchange

the evident decline in risk aversion has led some speculators to re-engage in risky trades

Data released yesterday morning show that pending home sales in the United States rose 0.7% in February relative to the previous month, somewhat stronger than expected. Moreover, the series, which declined roughly 15% between late 2005 and mid-2006, has been broadly stable over the past six months or so, suggesting that the market for existing homes may be stabilizing. In addition, oil prices dropped more than $!/barrel yesterday on hopes of a peaceful resolution to the U.K.-Iranian standoff. These two developments helped to lift U.S. equity prices yesterday, which carried over to Asia last night. The Nikkei index rose 1.7% last night, and most other Asian stock markets closed 1% to 2% higher. Indeed, the Chinese stock market is now about 10% higher than its previous peak. (Recall that the 9% decline in the Chinese stock market on February 27 helped to usher in a wave of risk aversion among investors.)

As we wrote yesterday, the evident decline in risk aversion has led some speculators to re-engage in risky trades, including yen carry trades, which may help to explain the recent depreciation of the yen. Elsewhere, currency markets have been generally quiet. The Reserve Bank of Australia surprised most market participants last night by opting to keep its policy rate unchanged at 6.25%. (A 25 basis point rate hike was widely expected.) The Aussie tanked in the immediate aftermath of the news, but it quickly recouped all of its losses. As expected, both the Eurozone and U.K. service sector PMI's remained at high levels in March, suggesting that economic activity in both economies remains very solid.

Attention now turns to the U.S. data releases that are on the docket this morning, including ADP employment data, which are a prelude to the U.S. labor market report on Friday, factory orders data for February, and the ISM non-manufacturing index. Stronger-than-expected numbers this morning could lead to some near-term dollar gains, but disappointing data could weigh a bit on the greenback.