Forex News And Analysis: April 18, 2012

The dollar remained marginally stronger than the euro and the yen on Tuesday although it weakened versus the pound and the aussie. The mixed day was due to a general rise in risk appetite caused by several factors including an easing of eurozone debt fears - after a sale of 12 and 18 month bills in Spain went more smoothly than expected - and the ZEW investors survey which showed a rise in confidence in the region.

Data from the IMF also helped raise spirits after it revised its growth forecasts higher as a result of slight improvement in the global economic outlook. Its global forecast rose to 3.5% in 2012 and 4.1% in 2013, whilst U.S growth was revised up to 2.1% in 2012 from 1.8% previously and 2.4% from 2.2% in 2013. Whilst the IMF did not discount the continued risk of a crisis erupting in the euro area, it was on the whole more optimistic and gave a boost to U.S stocks which weighed on the greenback. Meanwhile on the U.S front, data was mixed, with Housing Starts down by -5.8% but Building Permits up 4.5%, which overall seemed to suggest some green shoots although continued headwinds very much also still a factor reducing performance in the property market.

EUR

The euro survived and bounced on Tuesday after expectations to the downside failed to materialize and positive data reached out a supporting hand. The main focus was Spain and the sale of 12 and 18 month bills which resulted in a better-than-anticipated results, with more than the 3bn selling and demand for the 12 months' solid at 2.19 times compared to 2.14 times previously, whilst the 18 month bills saw demand at 3.77 times vs the 2.93 times previously.

In addition, much pressure was relieved by the news that the 10-year Spanish benchmark bond had come down below the 6.0% danger level. Many analysts are still negative, however, about Thursday's sale of Spanish 2014 and 2022 bonds which they see as a much tougher test of investor appetite than the short dated debt sold on Tuesday. The euro was also buffered by an above-expectations result for the ZEW investor survey which rose to 13.1 from 11 previously and rose in Germany for the 5th straight month. Eurozone CPI was also solid at 2.7% when a fall to 2.6% had been expected.

GBP

Sterling continued its strong trend. It was supported by better-than-expected inflation data which showed a rise in CPI YoY (Mar) of 1 basis point to 3.5% which was also a basis point higher than expectations. Core Consumer Prices also increased to 2.5% compared to 2.4% previously which was also higher than the 2.3% expected, revealing depth and range in the inflationary pressures.

The robust inflation data helped support expectations of the adoption of a less accommodative stance by the BOE and thus aided the sterling's upwards push. Previously, a more deflationary outlook had led to expectations of the BOE increasing asset purchases in May. Instead, BOE policy-maker Adam Posen adopted a more hawkish tone on Tuesday saying: “If the core inflation rate doesn't come down on a substantial basis, then we have got to rethink.” So from expectations of QE it is now possible the BOE may put up interest rates to reduce inflation instead, so they fall in line with their 2% target.

JPY

Yen weakened on Tuesday after the strong risk averse atmosphere of the preceding sessions when Spain's woes had dominated slowly eased. A reassuring performance in a sale of Spanish short-term debt helped restore investor risk appetite which was given further support by a rise in investor confidence and IMF growth forecasts which were revised up to reflect a slightly better outlook for the whole world.

Data showed a slight rise in Consumer Confidence to 40.3 when 40 was expected and 39.9 previous. Industrial Production remained the same at 1.5%. All other metrics fell, however, with Tokyo Condominium Sales down to -6.1% vs 13.0% expected; Capacity Utlization (Feb) MoM fell to -1.7% when 3.4% was the previous print. Tomorrow's data could be market moving as it will show the trade deficit which is expected to show another unusual deficit, which would be negative for the yen. There is a chance the yen could begin to weaken again the weeks to come as a combination of greater yield differential with the U.S and the increased cost of importing fuel as the closure of nuclear power stations begins to weigh on demand for the yen.