Daily Forex Brief London: Monday 30th April 2012

The dollar's gentle descent

It has been exceedingly gradual, but the dollar has been drifting downwards over the past two weeks. Not that we are talking about a big move mind you – the dollar index is down by roughly 1.5% over that time. That said, some of the major dollar crosses are at levels not witnessed for some time – cable for instance reached a 7mth high at just under 1.63 overnight. Indeed, the pound has been something of a revelation so far this year, despite the fact that the economy is apparently back in recession. Clearly sterling is attracting flows from a number of different sources. Just imagine how well the currency might be doing if the economy was actually registering the kind of growth that America is experiencing. The Japanese yen is also faring quite well, after a torrid period in February and the first half of March. Even the beleaguered Aussie has perked up, despite mounting speculation that the RBA will cut rates by 50bp by mid-year. All things considered, it has been an indifferent first four months of the year for the dollar, which is slightly surprising as the economy looks better than most, corporate earnings are healthy and the Fed has backed away from implementing further QE after Operation Twist finishes next month. Part of the explanation is that there has been a slight improvement in risk appetite recently. For now, some of the high-beta currencies such as the Kiwi and the ZAR are attracting interest, while sterling retains a very healthy bid.

Daily Forex Brief London: Friday 27th April 2012

Japan goes further

It seems like some time ago now that Japan threw everything, including the kitchen sink, at the deflation problem. Now they are ripping out the plumbing and anything else they can find to try and escape the deflationary slump which the economy has been suffering from for the best part of the past fourteen years. The latest meeting has seen the Bank of Japan expand its asset purchase-program by a further JPY 10trln (to JPY 40trln). It also chose to extend the maturity of both government and corporate bonds to be purchased under their QE program. It now has an inflation target of 1%, which it remains confident of reaching "in the medium to long term", but that is a long time in central banking terms and markets hold little faith in such a forecast, largely through the bitter experience of recent years (and not only in Japan).

Daily Forex Brief London: Wednesday 25th April 2012

China's grim warning

In what can only be described as a remarkably candid assessment, China's Ministry of Industry and Information Technology overnight claimed that both domestic and external conditions were still 'grim' and that the economy was likely to endure further downward pressure. Companies in China are confronting growing operational difficulties, including much higher prices for energy and substantially higher wages. Interestingly, there has been little response in Asia overnight to this report, with equities becalmed ahead of tonight's FOMC decision and Friday's BoJ meeting. In foreign exchange markets, even the Aussie ignored the warning, which is unusual because it is invariably extremely sensitive to changes in China's economic outlook. Instead, it appears that more attention was paid to Premier Wen Jiabao's promise to stimulate the economy through additional policy measures if required. More stimulus from Beijing cannot be far away because it is clear that the economy needs it to achieve the growth targets set by policy-makers.

Daily Forex Brief London: Tuesday 24th April 2012

Seeing red

Yesterday proved to be a fairly tumultuous day in markets, in stocks especially. For Europe, it was a combination of the economic and political that conspired to put pressure on investor sentiment. Events in both France (a likely change in president) and the Netherlands (a backlash against austerity) impacted sentiment, as did the softer PMI data for both France and Germany. For now, it appears that the factors that were supportive for most of Q1 (ECB 3Y money, Greece inching back from the brink and better US data) are waning, but suitable replacements have yet to be found. For FX, this is seeing a stronger return to 'risk-off' moves into month-end, so the dollar is firmer against most (the yen excepted) and the Aussie is suffering the most, helped by softer inflation data overnight.

Daily Forex Brief London: Monday 23rd April 2012

Cautious pessimism

During April, markets have displayed a far more cautious tone to that seen through most of the first quarter. FX markets were earlier than most to adopt this tone, with high-beta currencies turning at the start of March, much earlier than most equity markets. As we enter the last full week of April, this approach seems set to continue. The first round of voting in the French presidential election campaign has strengthened the view that Sarkozy is unlikely to see a second terms and markets are slightly nervous regarding his likely successor, Francois Hollande. The US Federal Reserve also meets this week, but all the signs are that it is unlikely to satisfy those hoping for a fresh round of quantitative easing, despite the ongoing underlying weakness of the economy. Furthermore, the latest PMI data from China (HSBC manufacturing series) increased to 49.1 (from 48.3), keeping alive concerns about the extent of the slowdown currently being seen in China. Finally, the latest producer price inflation data in Australia appear to have further cemented the case for a fresh rate cut next month. Cautious pessimism is likely to remain the theme as we head into month end.

Daily Forex Brief London: Friday 20th April 2012

More trouble and strife

Yesterday's bond auctions might have gone well enough, but unfortunately other issues are brewing in Europe and moreover they are getting progressively worse. In Italy, as the economy reverses more rapidly than expected, the fiscal dynamics look increasingly problematic. Unsurprisingly, the IT/GER 10yr spread widened another 15bp to almost 400bp. Spain is in the doghouse as well, for similar reasons, with the 10yr yield not far short of 6.0% again. Also worth noting is the continued underperformance in France – the 10yr FR/GER yield spread was 15bp wider at 140bp at one point, compared with 100bp just a month back. Part of the explanation lies in the increasing likelihood that François Hollande will become France's next President. Hollande has been threatening to renegotiate the fiscal compact if elected (little wonder Merkel wanted to campaign for Sarkozy), and he has vowed to raise the minimum wage; he also wants the ECB to be more active in resolving Europe's sovereign debt crisis. Not to be outdone, New Democracy Party leader Samaras has pledged to push back implementation of the Greek bank recapitalisation plan until at least after the election. Just as well some of Europe's finance ministers are gathered together in Washington – they might as well start discussing how to deal with Europe's next financial tsunami. As the IMF's latest Global Financial Stability Report made clear, European faces a huge credit crunch over the next 18 months as banks shed USD 2.6trln of assets. Strap yourself in, there is worse to come!

Daily Forex Brief London: Thursday 19th April 2012

A lovely shiny pound

Of the major currencies it has been the proud pound that has been leading the way so far this year. Following yesterday's less dovish MPC Minutes and the surprisingly strong employment figures, cable is back through 1.60 once more and EUR/GBP is at a 20mth low of 0.8180. Against the Japanese yen the pound has advanced by almost 10% so far this year. Numerous explanations account for this more buoyant performance: the pound is very competitive, many sovereign wealth funds and high net worth individuals are still spooked by the euro (see below) and regard UK assets (such as London property and gilts) as safe-havens, and the economy appears to have avoided falling back into recession. In addition, other major currencies such as the Japanese yen, the Australian dollar and the Swiss franc are regarded as being very expensive, so it is little wonder that sterling is on the radar of money managers. Looking ahead, these sources of demand are likely to remain evident for some time to come. The message for a while now has been 'do not underestimate the pound'.

Also in today's Daily Forex Brief:

• UK QE loses its biggest sponsor
• Spain goes back to its roots
• Reserve managers snub their nose at the euro
• Yen softens amidst talk of more BoJ easing

Daily Forex Brief London: Wednesday 18th April 2012

Back in black

Buoyed by more optimistic IMF global growth forecasts for 2012 and increasing speculation that Beijing will soon take further steps to ease financial conditions, the appetite for risk has suddenly improved. Also contributing to the more positive tone was some decent earnings news out of the US from the likes of Coca Cola overnight, some encouraging growth news out of Germany and acceptable auctions in Europe, notably Spain. Apple shares surged 5% amid hopes that next week's earnings will reveal strong demand for iPads. In addition, the falling price of Brent crude is helping to soothe nerves. In Europe, the Euro Stoxx 50 jumped nearly 3% and is now back in the black for the year to date, while the S&P was up 1.6%, its best performance for a month. High-beta currencies such as the CAD and the Aussie did well, the latter now close to 1.04 again. Both the dollar and the Japanese yen have given back some of their recent gains.

Also in today's Daily Forex Brief:

• Euro whiplash
• UK inflation still uncomfortably high
• Lower oil price a welcome relief

Daily Forex Brief London: Tuesday 17th April 2012

If not for America...

Last month's disappointing payrolls report aside, there is a growing body of evidence that the US recovery is looking both more durable and broad-based these days. For instance, JP Morgan Chase Chief Executive, Jamie Dimon, suggested on Friday when announcing his firm's stellar quarterly earnings results, that the US housing market was "very close to the bottom" and that the debt-service ratio for US households was the lowest in twenty years. He was also upbeat on the state of corporate America, claiming that businesses were cashed up, well-capitalised and generating decent earnings growth. Recently, data published by the Federal Reserve showed that the ratio of liquid assets to short-term liabilities for corporations is now the highest in nearly 60 years! Wells Fargo, another US banking heavyweight, reported that mortgage applications soared 84% in the year ended March. Both JPMorgan and Wells Fargo are themselves in a strong position, having passed the Fed's latest stress tests with flying colours and now able to recommence dividend payments to shareholders. Yesterday's US retail sales were also encouraging, up 0.8% in March after a 1.0% increase in the previous month and a 0.7% rise in January. In Q1, retail spending surged at an annualised pace of almost 8%, or around 6% in real terms. Separately, statistics from the American Bankers Association shows that consumer loan-delinquencies fell in Q4 for the first time since 2004. At the very least, the US economy seems better-equipped to deal with exogenous shocks such as the recent surge in oil prices. Let's hope so – the world economy desperately needs the US to shoulder the growth mantle these days.

Daily Forex Brief London: Friday 13th April 2012

China's juggling act

The big question this morning for markets is whether to meet the latest Chinese GDP data with concern that it was lower than expected, or relief that the economy is slowing in an orderly fashion and will be supported by the largest increase in yuan-lending for a year. The initial reaction, as suggested by the Aussie's movement, is that concerns are more about the slower than expected pace of growth, AUD down around 0.5% in the wake of the release. The yen is also the only leader vs. the dollar after the numbers. Also seen were modestly firmer industrial production numbers for March (11.9% YoY) and retail sales figures, which were in line with expectations at 14.8%. China is juggling a lot of balls right now, trying to slow the economy a little, rebalance it towards consumption, ensure that property prices soften rather than crash and control lending so it does not fuel potential new bubbles. For now, it looks like policy-makers are achieving their goals but it's a precarious balance.

Also in today's Daily Forex Brief:

• Monti's continuing battle
• Housing still a big US headwind
• The impending franc attack

Daily Forex Brief London: Thursday 12th April 2012

Asian cheer tempers European fear

Bolstered by some reasonably encouraging growth data, the mood in Asia overnight has been constructive, with broad gains in the major bourses of around 1%. Both Australia and South Korea recorded better than expected employment outcomes last month; in the latter, the unemployment rate fell to 3.4% in March from 3.7% previously. In both Malaysia and the Philippines, exports soared by 15% in the most recent month. Also, Fed Vice Chairman Yellen gave her imprimatur to the Fed's highly accommodative stance (she was hardly going to say anything else, now was she?), and the Fed's Beige Book showed that all twelve regions are growing and that key indicators such as manufacturing, jobs and retail sales are showing signs of strength. Asian currencies are generally stronger overnight – the Aussie for instance is now at 1.04, up from yesterday's three-month low of 1.0226. Asia's better tone was assisted by a slightly more sanguine session in Europe. Apart from some speculation that the ECB might be prepared to re-charge its SMP to bring down Spanish government borrowing costs, there was some good news to emerge from various US companies at the commencement of the latest reporting season. Yesterday's improvement may prove to be merely a brief respite – despite the best endeavours of the Rajoy government it is clear that the Spanish economy is going backwards at a rapid rate. Europe's leaders will need to get its frequent-flyer cards ready because we can expect a lot more of those legendary late-night meetings over coming months.

Also in today's Daily Forex Brief:

• Chinese currency calm
• Will ECB be Saviour or Grim Reaper?

Daily Forex Brief London: Wednesday 11th April 2012

That sinking feeling

European stocks were down once again yesterday; the Euro STOXX 50 index has fallen in seven of the past nine sessions and is not far off flat for the year. The Nikkei has also sold off for the seventh consecutive session. It seems that for most of the year to date, investors have been able to hang on to the perception that the US economy is gaining traction and the eurozone credit crisis, if not past its worse, had at least moved back from peering over the cliff edge. This is not totally unfamiliar territory for markets, given we've seen several periods since 2009 during which markets have priced in a sustained recovery, with reality then choosing to bite. For FX, it's the traditional safe-havens that are taking the strain, the yen having unwound around one third of the recent depreciation and the Swiss franc battling with the ceiling imposed by the SNB.

Also in today's Daily Forex Brief:

• SNB vs. the markets
• Turbulent times down under
• Spain's struggle

Daily Forex Brief London: Tuesday 10th April 2012

The modest dollar adjustment

In the wake of the US jobs numbers on Friday, which saw the dollar softer as QE3 talk was once again re-ignited, the dollar has continued south, although only modestly so, the dollar index down around a further 0.2% in the aftermath of the release. In sum, the weaker headline payrolls data should be put in the context of what has been very strong labour market data over the past six months, above and beyond the messages from elsewhere in the economy. So if last week's release went some way to narrowing this gap, perhaps that is not such a bad thing after all? Furthermore, the numbers were not overly bad, with the unemployment rate still falling and manufacturing employment growing more strongly than expected. The Fed is still likely to put a lot of conditionality on further quantitative easing, a view Friday's numbers should not change

Also in today's Daily Forex Brief:

• The impending battle on the Swissie
• China back to black
• The struggle for stimulus in Japan

Daily Forex Brief London: Thursday 5th April 2012

The dangers of liquidity addiction

On a day when the robustness of the US recovery stood in sharp contrast to the continuing difficulties being experienced in Europe, it was little wonder that the dollar consolidated the gains witnessed the previous day in response to the hawkish FOMC Minutes. From the respectable ADP jobs figures to the decent auto sales numbers and signs of a tightening rental market, the prognosis for the US economy does have a healthier glow. However, in Europe, ECB President Draghi spoke about downside risks to the economic outlook after a 0.3% decline in euro-area GDP in the final quarter of 2011. To make matters worse, the Spanish bond auction went poorly. As a result, risk appetite waned, the euro swooned and commodities headed south. The single currency threatened 1.31 at one stage – a couple of days ago 1.34 was in sight; EUR/JPY traded at 108 after nearly touching 110. Equities did not like the more hawkish stance on monetary policy from either the Fed or the ECB, with the German DAX down nearly 3%. Gold was a big loser – prior to the Fed Minutes it was up near USD 1,680 but by yesterday afternoon had fallen USD 60 to a three-month low of USD 1,620. Peripheral European bond yields rose sharply; the Spanish 10yr yield was up more than 20bp at 5.63%. Investors and traders were collectively throwing their toys out of the cot at the prospect of the major central banks no longer supplying them with perpetual free liquidity. Just like an alcoholic denied their liquor, threatening to withdraw liquidity from heavily-addicted asset markets can have very nasty consequences

Daily Forex Brief London: Wednesday 4th April 2012

USD benefits as Fed dismisses extra QE talk

Fed officials seem more relaxed about the state of the economy, judging by the contents of the March 13 FOMC Minutes released last night. At the previous meeting held late in January, some policy-makers felt that additional monetary easing may well be required before too long because of the sluggish nature of the recovery. That position has now shifted – additional stimulus will only be forthcoming: "if the economy lost momentum" or should inflation stay below the 2% target. At the same time, the US central bank still believes that the economy needs an extended period of record-low interest rates (through to the end of 2014). Some members of the FOMC are unconvinced that the improvement in the labour market witnessed over the past couple of quarters will be sustained in the months ahead. In response to the Fed's more hawkish tone, the dollar recorded instantaneous gains against the majors of around 1% - the euro for instance is now at 1.32, cable is under 1.59 and USD/JPY almost touched 83.0 overnight. Risk appetite has suffered – the 10yr treasury yield jumped 15bp to 2.30% at one stage. US equities were lower (although not by that much), and the Nikkei has fallen by more than 2% overnight.

Also in today's Daily Forex Brief:

• The importance of March payrolls
• A sunny Britain
• Brazilian PM opens her cheque-book

Daily Forex Brief London: Tuesday 3rd April 2012

America's economic defiance

Against the backdrop of weaker demand both in Europe Asia, it is just as well that the world's largest economy is showing some economic resolve. Indeed, it could be argued that the ability of the United States to demonstrate such resilience into the teeth of this global economic headwind is actually quite impressive. On a day when various manufacturing indices across Europe and Asia made for fairly depressing reading, the ISM index for March popped up to 53.4, above the 6mth average and in excess of expectations. Production and orders were relatively buoyant, while the employment component registered a 9mth high. Commenting on the figures, a spokesman for ISM claimed that the first quarter had shown consistent growth. The recent decline in oil prices, together with growth figures such as these, are supporting risk appetite.

Also in today's Daily Forex Brief:

• Improving British fortunes
• The continuing retreat in global manufacturing
• Some big moves in the yen crosses
• Europe's shame on youth unemployment

Daily Forex Brief London: Monday 2nd April 2012

Rajoy's fiscal high-wire act

Spain's new government has announced spending cuts and tax increases worth an estimated EUR 27bn in an endeavour to reduce the gaping fiscal shortfall from 8.5% of GDP at the end of last year to 5.3% by December 31st. Most of the pain is being absorbed by departmental spending – all ministries are to reduce spending by 17%. In addition, power prices are to rise by 7% and the tariffs that electricity companies pay is to rise by 5%. Also, larger companies are to be taxed more heavily, the system for corporate tax payments is to be reformed, corporate tax deductions are to be reduced and there will be a crackdown on tax fraud. These tax modifications are expected to generate EUR 12.3bn in additional revenues in the current year. Budget Minister Montoro claims that central government will reduce the size of its budget by 2.5% of GDP. Recall that Spain has vowed to reduce the size of the fiscal deficit this year by 3.2 percentage points of GDP, so the balance of the fiscal adjustment will come from the regional governments. This is a tough package. Politically, it should help to placate growing civil unease as pensions, VAT and social security have all been left untouched, although Rajoy will inevitably be forced to return to them. Income taxes were raised back in December. Rajoy's ministers will discover that chopping spending by 17% across the board in such a short time is an immensely difficult task. At the very least it will result in significant extra unemployment amongst public sector workers, at a time when the unemployment rate is already above 23%. With the economy already in recession, it would be extremely surprising if this package is sufficient to lower the deficit to the 5.3% target. Neither investors nor traders will respect the failure to tackle benefits, implement a VAT hike or rein in pensions

Also in today's Daily Forex Brief:

• Is Europe doing enough?
• Chinese confusion
• Yen may struggle to hold recent gains