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