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

Daily Forex Brief London: Thursday 29th March 2012

The importance of capex to the US recovery story

Notwithstanding the general mood of optimism surrounding US recovery prospects, there is one recent development that needs to be watched closely. If the US economy is to reach a point whereby it becomes self-sustaining, then a critical ingredient will be decent growth in business investment. Since late summer, the pace of growth in private capital spending has stalled, as proxied by non-defence ex-aircraft capital goods orders. That said, the actual value of capital goods orders is currently consistent with that which prevailed in the first half of 2008 before the GFC. Part of the explanation for the slower growth in capex lies in the maturation of the inventory cycle. In addition, some investment spending was clearly brought forward ahead of January's halving of an investment tax credit. More encouragingly, a survey of US executives in the manufacturing and services sectors (conducted recently by KPMG) generated record highs in terms of optimism regarding revenues, profits and new business. US service sector companies are overwhelmingly bullish – 96% of US executives in this sector expect hiring to remain the same or increase this year. Attitudes to capital spending are also very buoyant in both sectors. Should the outcome of this survey actually be replicated out there in the real economy, then the prospects for the US economy look (at the very least) quite sound, with the potential to surprise on the upside.

Also in today's Daily Forex Brief:

• Yet more euro short-covering
• The pressure on UK households
• A bumpy time in China

Daily Forex Brief London: Wednesday 28th March 2012

The unlucky Aussie

Once again it is the latest decline in the Aussie dollar that is attracting most interest in the forex market this morning. After reaching a high of 1.0560 yesterday and looking relatively comfortable, the selling pressure since has been relentless, and in late Asian trading the AUD fell to a low of 1.0420. Not even a mildly encouraging RBA report on financial stability down under provided any assistance. Also worth highlighting is the Aussie's continued losses against other major currencies – GBP/AUD has climbed to 1.53 from a mid-February multi-decade low of 1.4556, and EUR/AUD is close to 1.28 (the mid-February low was 1.2133). Asian equities were softer overnight, with the Shanghai Composite again leading the way, down another 2%. The sluggish relative performance of both the Australian currency and the Chinese stockmarket are not unrelated – investors and traders share a suspicion that China is experiencing something rather more turbulent than a soft landing. For the month-to-date, apart from the BRL, the Aussie is the worst performer of the major currencies. Interestingly, it is the pound that tops the performance standings – these are rare days indeed!

Also in today's Daily Forex Brief:

• Oil prices now the biggest growth headwind
• Dark days ahead for the Dutch
• The wobbly won

Daily Forex Brief London: Tuesday 27th March 2012

Bernanke reaffirms ultra-loose policy stance

Yesterday's remarks by Fed Chairman Bernanke have put paid to the recent hypothesis that the Fed might be reversing its commitment to an extended period of ultra-loose monetary policy any time soon. His suggestion that wages growth remains subdued because of the weak labour market scuppered speculation that the Fed might need to start raising rates as soon as 2014. Although Bernanke acknowledged the better news on both the labour and housing market fronts, he reaffirmed that the Fed would stay cautious. The content and tone of his remarks is completely understandable, notwithstanding the recent suggestion from two regional Fed Presidents that policy officials in the US might need to revise the setting of monetary policy before too long. At their last meeting on March 13th, policy-makers at the Fed slightly raised their forecasts for growth this year, although they observed that unemployment remained elevated and that there were still 'significant downside risks' to growth. Last week, the Fed Chairman told Congress that higher oil prices represented an additional headwind for growth. New York Fed President Dudley recently pointed out that roughly half of the improvement in the unemployment rate over the past six months was due to declining labour force-participation. Dudley claimed that a rising proportion of Americans have left the labour force because they have become discouraged after a lengthy search for work. It remains to be seen whether this latest shift in expectations is premature

Also in today's Daily Forex Brief:

• Bernanke's dovishness gives the dollar the boot
• Tough times in India
• Contrasting Germany

Daily Forex Brief London: Friday 23rd March 2012

Dollar dominance

The US currency is only 0.5% below the opening level of the year, looking at the DXY dollar index and has been on a rising trend for most of the week. Whilst there are concerns with the turn in peripheral bond markets and the softer tone to equities this week, the FX markets have been in a 'risk-off' mood for most of the month to date, with the Brazilian real 5% softer and the Aussie nearly 3% lower. There's a debate to be had as to what extent this is down to the better US data and there has been more from Fed officials overnight suggesting that rates are likely to be raised before the end of 2014 – despite the previous pledge by the rate-setting committee. But equally key have been the perceived stretched valuations of some of the higher-yielding currencies, with Brazil being the most vocal and active in its fight against a stronger real. This week's moves suggest bond and equity markets are only just coming round to the FX markets' way of thinking.

Also in today's Daily Forex Brief:

• Tough times for the Aussie
• Ireland slippage
• Some perspective on the US jobs market