Daily Forex Brief London: Tuesday 28th February 2012

Hanging on for the ECB

As we head into the second auction of 3Y funds from the ECB (results announced tomorrow), markets remain in a positive frame of mind. Bond yields in Italy are near the lows of the year, stock markets remain bullish (Euro Stoxx 50 up nearly 10% year to date) and the euro is firmer against the dollar, even though S&P announced Greece was in selective default. Despite this bullishness, it's become apparent that sentiment is still uncertain regarding this week's 3Y auction, with both bullish and bearish cases being constructed around high and low outcomes for the total allocation of funds (see our Insights blog of last week 'The ECB's LTRO dilemma'). There's clearly a risk of a classic 'buy the rumour, sell the fact' scenario around the ECB auction.

Also in today's Daily Forex Brief:

• The ECB sits back for a second week
• Turning the eurozone lending tide
• Accelerating yen weakness

Daily Forex Brief London: Monday 27th February 2012

G20 says 'do more'

At the latest meeting in Mexico, the G20 has told the EU to do more to help itself before turning to the international community for support. It's not the first time it has heard this message, but it underlines the ongoing vulnerability of the rescue mechanisms in Europe, namely that the firewalls currently in place are insufficient to provide a sufficient backstop to Italy and also Spain. On paper, Europe can afford to do so, but in practice there are major political and institutional barriers. Germany remains most opposed, not surprisingly given it will have to stump up the most funds towards any increase. This is going to be a growing issue as we head into the next EU summit at the end of this week.

Also in today's Daily Forex Brief:

• Aussie leadership issue put to bed for now
• Not the best time for an oil crisis
• Fighting the south-north flow

Daily Forex Brief London: Thursday 23rd February 2012

Putting on the brakes in China

There is growing speculation that China will formally lower its growth target early next month when the National People's Congress meets in Beijing. It is China's impressive growth numbers that have always caught the headlines, together with its comparative resilience during the financial crisis. But there have always been numerous more worrying issues bubbling just below the surface, such as the environmental costs, over-investment and the fact that inequality has been growing rapidly. At the same time, wages' growth is becoming a problem, something that is difficult to see retreating given that growth in the labour force has flattened out and is likely to be declining in the coming years. There are also issues around initiating a soft and controlled landing of the property sector, not an easy task by any means. So, the magic 8% number may on the way out, but it's not going to be easy for China to balance all these competing needs and risks.

Also in today's Daily Forex Brief:

• Yen primarily a rates story
• Sterling hurled lower
• The potential hit from political instability in Australia

Daily Forex Brief London: Tuesday 21st February 2012

Yet another all-nighter in Brussels

These days, one of the strongest-performing sectors in Europe is catering - supplying food and drink to the cognoscenti at all of these meetings of European leaders in Brussels. It was another all-nighter for finance ministers, resulting in a statement being issued at around 4:00am. Greece has apparently won a second bailout from Europe worth EUR 130bln, with private sector bond-holders supposedly accepting a haircut on their Greek holdings of around 75% in net present-value terms. There is much to be done in a very short time before this deal can be said to be actuated. For instance, bond-holders must accept the terms of the debt swap, and each of the eurozone's individual parliaments must sanction it post-haste. A lot can, and probably will, go wrong. But for now, markets are prepared to suspend disbelief and buy the politicians' hyperbole. Invariably, this response results in regret later on, usually very quickly. Watch this latest deal unravel over coming days, as it inevitably will.

Also in today's Daily Forex Brief:

• As good as it gets for risk assets
• Record trade deficit adds to yen woes
• Britain's two-tier housing market

Daily Forex Brief London: Monday 6th February 2012

Do not be fooled by US short-termism

Once again, the latest US jobs numbers were, at first glance, better than expected with a significant upward revision in the annual benchmark review also adding a supportive tone to the data. The reaction of the dollar has been understandable, the dollar index up 0.5% on the perception that further QE is now less likely. Furthermore, both November and December jobs growth were revised higher by 60K, and the unemployment rate fell to 8.3%, the lowest reading for nearly three years. Of course, for some this sits uncomfortably with the Fed's pledge to keep rates close to zero for nearly the next three years. Looking at the bigger picture however, and on closer examination of the data, it's not that difficult to square the circle. Firstly, there is the state of the labour market so far during this recovery. Whilst the economy may have passed its pre-recession peak in output, the labour market still has to see employment expand another 4% on the payrolls measure to achieve the same. The other stand-out feature of this report is the sharp fall in the participation rate, the largest monthly decline for just over two years, although this was down to the population control effects from the annual revisions. What they are showing is that just 63.7% of the working age population is either in work or looking for work. So whilst this report has been positive for the dollar and painted a decent picture of the labour market relative to where we thought it was beforehand, it should be considered in the context of the overall recovery and the extent of labour force participation. The latter remains particularly disappointing and goes a fair way to explain the stagnation of median incomes over the past decade. The closer the US gets to the presidential election the more short-termist politicians will become in relation to these the numbers.

Daily Forex Brief London: Thursday 2nd February 2012

Safe-haven stress

One of the more remarkable developments during January was the relatively strong performance of the traditional safe-haven currencies, principally the yen and Swiss franc. We wrote about this during the course of last month, but the Swissie is particularly under the spotlight, given the proximity of EUR/CHF to the 1.20 floor imposed by the SNB last September. The Swissie only needs to appreciate another 0.5% vs. the euro to reach the 1.20 level, so the market is becoming increasingly nervous of further intervention by the central bank. The remarkable thing is that this has come at a time when the euro has been subject to some fairly severe short-squeezes, a function of the stretched short positions which lie beneath (see comments below). Once positioning becomes more neutral on the euro the SNB is likely to have an even tougher time defending the line in the sand it has drawn. Bear in mind also that creating so much liquidity is not a costless exercise in terms of its impact on the domestic economy. At some point in the not too distant future things could get rather messy for the Swissie and for the SNB in particular.

Also in today's Daily Forex Brief:

• The ECB pressure on peripherals
• Seeking data justification
• A merciless euro short-squeez

Daily Forex Brief London: Wednesday February 1st 2012

Dollar still sliding on more Fed QE

After a relatively encouraging first month of the New Year, the dollar index has fallen by 3% since mid-January, in part due to the Fed's surprising endorsement of more quantitative easing. Last Friday's GDP numbers were remarkably weak, confirming the prognosis of a number of Fed officials who feel that the economy could do with some further assistance. In addition, the dollar has been sold as a counterpart to the sharp short-covering rally in the euro; recall that two weeks ago, euro shorts registered a record high. The EUR had another look above 1.32 yesterday but ran into heavy selling traffic once more. Of interest is that the likes of the pound and the Aussie have essentially been steady against the single currency since mid-January, confirming that this is mostly about the dollar. It could well be temporary weakness, especially if the economy shows some resilience again. Friday's January payrolls figures could re-shape this debate

Also in today's Daily Forex Brief:

• Chinese economy holds up in January
• Greece buffeted by new troika demands
• Portugal peers over the precipice
• The difficulties of lending to the IMF