Forex New And Analysis: April 17, 2012

The dollar weakened on Monday, partly due to US Retail Sales figures which showed a better-than-expected rise and helped restore investor risk appetite. Sales rose by 0.8% in March when a 0.3% rise had been expected, although this was still below the 1.0% print in February. The fall in haven demand may also have been offset by a lessening of the likelihood of more quantitative easing (QE).

Other data was mixed with Empire State Manufacturing in April down to 6.56 vs. the 18 expected and 21.3 previous, although, analysts for the most part interpreted the negative print as a ‘blip’ rather than evidence of a downtrend. Other data also showed a fall in the amount of long-term assets such bought by outside investors. This would normally be a negative sign for the dollar, however, the balance of trade in securities overall, including short term assets, rose, as measured by Total Net TIC flows, which gave a 107.7bn dollar print compared to the 30.0bn expected and 3.1bn in January. Business Inventories (Feb) came out as expected at 0.6% whilst the NAHB Housing Index (Apr) fell to 25 when 28 was the consensus estimate.

EUR

The euro fell early on Monday but then made a recovery in most pairs and was trading marginally higher against the buck at time of writing, although it was still down versus the yen and the pound. Concerns over rising Spanish borrowing costs were the catalyst for the bearish move overnight which took the EUR/USD briefly to below the line-in-the-sand at 1.3000. The yield on Spain’s 10-year benchmark sovereign bond rose to above 6.0% temporarily for the first time this year and other peripheral bond yields broadly followed suit, with Italian benchmark yields not far behind at around 5.55%.

Data from the ECB showed it bought no bonds in the previous week and this prompted calls from Spanish policymakers for more aggressive QE to help stabilize borrowing costs. The original revelation that Spanish banks had borrowed 30% of the total 1tr 3-year LTRO made in December and recently again in March was the original reason for the resumption of the downtrend, as it sparked worries about the state of the financial system in the struggling peripheral. The outlook for the euro remains pressured with further Spanish bond sales eyed on Wednesday and Thursday.

GBP

Sterling traded higher on Monday after the release of US data showed a substantial rise in Retail Sales in March, which helped boost risk appetite and led to a reversal in the cable, whilst the pound was already up versus the euro, which was weighed down by selling associated with concerns about rising borrowing costs in the periphery. UK data was positive with the Rightmove Housing Index showing a 3.4% rise in April YoY versus the 2.2% rise in the previous month; MoM showed an increase of 2.9% over the more moderate 1.6% noted previously.

The pound also found support from safe-haven demand as euro increasingly came under pressure and U.K data remained better in comparison. Lower expectations of monetary easing from the BOE also helped support sterling. In the week ahead Wednesday stands out a day to be watching sterling and keeping an eye on the data as both the BOE minutes and employment data are scheduled for release on the same day.

JPY

The yen appreciated the most on Monday as it benefited from the rise in risk aversion caused by the sovereign debt jitters sparked by Spain. Yen continues to strengthen after US Treasury yields fell dramatically following the recent negative employment figures, particularly April NFPs. Data showing a rise in retail sales may also have helped underpin the yen even if it lessened risk aversion in the US.

Nationwide Department Store Sales rose by 14.1% YoY (Mar) compared to only -0.4% in the previous month and Tokyo Department Store Sales rose by 26.7% vs – 1.8% in the previous month. Analysts’ predictions of a slowdown in the yen have yet to materialize but their arguments are compelling. A squeeze on the yen caused by higher fuel costs because of the lack of nuclear power and the high cost of Asian fuel prices compared to US fuel, as well as an expected rebound in US 2-year bond yields caused by a rise in rental prices are seen as twin potential catalysts for a resumption of the uptrend in USD/JPY which stalled at the end of March.