Forex News And Analysis: April 12, 2012

The dollar traded mixed on Wednesday, rising versus the yen and the franc but falling to the riskier currencies such as the euro. The single currency managed to recover after a bad start, following comments from an ECB official in which he suggested the central bank could use quantitative easing (QE) to purchase Spanish debt, after scared investors dropped it and borrowing costs soared. Sterling also strengthened after better-than-expected retail sales data helped improve the outlook for the UK economy.

Commentary from Fed officials was mixed with Lockhart playing down recent poor employment figures and dismissing QE as an emergency policy; Fed's George focusing on the need for tougher banking regulation to end the dependency on 'too-big-to-fail' and Rosengren exclusively discussing the risk to money market funds of toxic derivatives. The message was on the whole less dovish and the Fed's Beige book - which is a report on economic activity in the 12 Fed regions - showed activity was on the whole positive, especially manufacturing which grew in all the regions. This also helped reduce expectations of more QE – although the picture of hiring was less rosy with many more workers on part-time or temporary contracts due to employer uncertainty about the future.

EUR

The euro rebounded temporarily on Wednesday but then gave up its gains as the day progressed. Overnight pessimism because of Spain's borrowing costs rising above the unsustainable 6% level prompted calls by the chairman of Spain's largest bank BBVA for the ECB to intervene and purchase Spanish debt. Initial reluctance soon faded and the euro rebounded after ECB board member Benoit Coeure eventually said that they would consider re-opening the bond purchase programme which had been closed after the LTRO pumped 1 trillion euros into the system.

The failure of the LTROs to prevent the recent bond criss in Spain however led to calls for more direct easing. The euro rebounded strongly on the suggestion of quantitative easing by the ECB and yields on Spanish 10-year bonds faded to 5.8%. On the data front, the German Wholesale Price Index for March showed a slowdown in gains 0.9% from 1.0% previously, whilst YoY gains were muted to 2.2% from previous month's 2.6%.

GBP

The pound rose on Wednesday after data showing a rise in retail sales increased confidence in the UK economy and some investors sought safety in gilts – which are British bonds - after Spain fears made investors wary of European assets. British Retail Consortium Sales Like-for-Like in March (YoY) rose by an unexpected 1.3% when 0.0% had been expected and the previous month had shown a fall of -0.3%. This followed on from yesterday's better-than-expected housing data which showed a slowdown in the deterioration of the property market. In fact recent positive data has encouraged a better outlook for the UK economy, leading to expectations that the BOE may not think it is necessary to increase quantitative easing in May as had been expected.

However, a more optimistic outlook for Britain would still not cancel out the risks of a financial crisis in the eurozone overspilling into the UK, since the eurozone is its largest trading partner. This would cancel out any safe-haven demand currently enjoyed by the pound which would probably be dragged down by the risk-aversion from the crisis over the channel.

JPY

The yen traded mixed on Wednesday as traders took profits from the massive rebound of the previous day when the yen had strengthened across the board following the strong sell-off in equities triggered by negative earnings releases from corporate Japan. The risk-aversion generated overnight, following fears over increasing Spanish borrowing costs triggered by a worsening of the economic outlook for the country, led to a rise in the yen as it benefited from haven-demand, however, reassuring commentary from ECB officials which hinted at more QE led to a rebound in risk and a weakening in the yen position later in the day.

The yen was under pressure against the dollar after commentary from Fed officials and a broadly positive data set helped moderate the plunge in Treasury yields following recent poor NFPs. This had closed the interest rate differential between the two currencies making the dollar more attractive as a carry trade funding currency and helped strengthen the yen further. However, the drop in NFPs has since been dismissed as an insignificant 'blip' with the US recovery expected to continue as before.