Thursday, 5 April 2012

Daily Forex Brief London: Thursday 5th April 2012

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

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