BRICS Countries Pledge Support For Europe, Helping Boost Risk Appetite: April 22, 2012

The news on Friday was dominated by the G20 meeting in Washington where the BRICS countries pledged support for Europe, helping to boost risk appetite in the process. As a result equities regained their foothold and the safe-haven buck fell as riskier assets became more popular. The head of the IMF Christine Lagarde managed to persuade China, Russian and the other BRICS countries to chip in to an IMF fund for bailing out struggling states, potentially in Europe.

There was some grumbling, notably from Canada which called for more voting power in return for the money but it was on the whole successful with estimates that the total amount made has reached around 400bn dollars. This helped increase confidence in the euro as it adds to the pot of money which can be reached in an emergency. There was very little data out for the US on Friday although all currencies may be affected by the elections in France on Sunday and the possibility of a change of administration potentially advantageous for the dollar.

EUR

The euro rose quite strongly after positive sentiment data from Germany helped increase confidence that the recent slowdown in growth in the German economy was only temporary and the largest economy in the eurozone was still on track. The IFO – Business Climate - sentiment survey for April rose by 1 basis point to 109.9 from 109.8 previously and out-performed predictions of a fall to 109.5; 'Current Assessment' rose to 117.5 from 117.4 and finally IFO 'Expectations' remained unchanged at 102.7 when a fall to 102.3 had been anticipated.

Other data showed a rise in German Producer Prices (PPI) which is a good sign for growth expectations and less dovish monetary policy stand-point. PPI (Mar) YoY rose to 3.3% when a fall to 3.1% had been expected; MoM the stat rose by 0.6% rather than the more muted 0.4% forecast. The euro was also supported by news that the IMF had managed to persuade BRICS countries to invest 400bn into its crisis fund, which will add to the money already in the eurozone fund. This increased confidence the financial system could survive the shock of a major eurozone economy collapsing.

GBP

The pound continued its impressive rally after data out on Friday showed a 3.3% rise YoY in Retail Sales in March compared to the much lower 1.3% expected increase and the 1.0% rise in the previous month. MoM showed a rise of 1.4% versus the 0.4% expected – and compared favourably with the -1.7% print logged in February. The data continued the trend for better economic data from the UK which has helped the pound strengthen over the last few months to now trade well into the 1.60s. Although the BOE was substantially less dovish in its last policy meeting and arch-dove Posen defected, the data reduces even further the chances the BOE will increase easing.

All this helped strengthen the pound on Friday, whilst eurozone debt jitters also eased after the IMF raised 400bn dollars for a rescue fund and German data was positive, and this further supported sterling given the inter-dependence with its neighbours. However, there is still concern due to falling wages and no growth or inflation can be viewed as 'real' until take home pay also rises. In addition major political changes could be on the horizon in Europe which are likely to increase instability further.

JPY

The yen continued to weaken on Friday but not as much as previous days. The optimism generated by the generation of a new bailout fund by the IMF with 400bn already raised helped restore risk appetite and encouraged investors to have more confidence. There was also better sentiment data from the eurozone and the UK continued its run of good data with a really strong showing in Retail Sales. With so much positive news it was always going to be hard for the yen to keep up but yesterday's trade data made matters even worse, with a much larger-than-expected deficit and no prospect of it falling.

Rising fuel prices today won't help as Japan needs to import so much of its fuel after the issue of reopening the nuclear industry in Japan remains a political hot potato. The little data which was released also failed to help the yen. The Tertiary Industry Index (Feb) MoM rose to 0.0% when a bigger rise to 0.7% had been hopped for, and Convenience Store Sales in March showed a 0.4% rise YoY which was down from the 4.8% of the previous month.