Risk appetite makes a comeback

Risk appetite made something of a comeback in the markets yesterday with the Australian and New Zealand dollars and South African Rand all registering strong gains on the day’s trading whilst the US dollar, a traditional safe haven currency asset lost ground, particularly after the first testimony from Federal Reserve Chair Janet Yellen to the US Congress. Yellen indicated that the US central bank will continue to scale back monetary stimulus and signalled that the recent drop off in the pace of employment growth and the turmoil in emerging markets will not stop the Federal Open Market Committee(FOMC) from gradually tapering their gargantuan Quantitative Easing program.

The FOMC decided to reduce its monthly bond purchases by a further $10 billion to $65 billion a month in January after cutting an initial $10 billion in December 2013.

Yellen also stated that in her opinion the labour market recovery still had a while to go following Friday’s weaker-than-expected jobs report. On Friday of last week, the US Labor Department revealed that US payrolls rose a seasonally adjusted 113,000 in January after December's lacklustre gain of 75,000 jobs whilst the unemployment rate fell to 6.6%, its lowest level since late 2008 but according to Yellen it remains well above the levels that the Fed see as consistent with sustainable employment.

Yellen told the Republican-controlled House Financial Services Committee that the "The recovery in the labour market is far from complete".

Yellen also advised that the Fed is likely to further reduce the pace of asset purchases at future meetings provided the economic data supports the expectations of an improving labour market and a rise in the rate of inflation.

US inflation remains well below the Fed's 2% target at just 1.5%.

In a boost to the US economy, overnight the Republican controlled US House of Representatives agreed to increase the US government's debt limit to $17.2 trillion for the next fiscal year after a 221 to 201 vote. US officials had said the US would otherwise breach the debt limit by the end of this month.
The US government will run a budget deficit of about $514 billion in the current fiscal year.
Meanwhile the Australian dollar reached a 4 week high yesterday after an upbeat local business survey helped the Aussie recover some of the lost ground of late after a measure of Australian business conditions rose to its highest in nearly three years in January according to the latest data. The private survey also showed that local firms felt more confident about the outlook for orders and employment than they have of late.

The upbeat assessment will please the Reserve Bank of Australia (RBA), which has been counting on a revival in the non-mining sectors of the Australian economy to offset the drag from a cooling resource boom as its biggest client, China continues to slow down.

The Aussie received a further boost overnight after data showed that Chinese exports unexpectedly increased by 10.6% from a year earlier with imports up by 10%. Some analysts had forecast flat growth or even a decline for both exports and imports.