FX news and analysis 12th Mar

USD

The dollar continued strengthening on Monday after it extended the trend Friday's expectation-beating Non-Farm Payrolls' report, which showed a rise of 227k employees when only 210k had been forecast. This reduced the likelihood of the Fed pursuing looser monetary policies to stimulate the economy and therefore supported the dollar. Over the weekend China released data which showed a surprise Trade Balance deficit (Feb) of -31.48bn dollars when only a -5.35bn had been expected and the previous month had shown a surplus of 27.28bn. This dampened risk appetite and sparked growth fears in the world's second largest economy. The euro recovered as the day progressed, however, and in the afternoon it was trading up after positive feedback from the E.U summit. However speculation overshadowed the success of the recent debt-swap as other peripherals are expected to follow the Greek example. On the data front the Monthly Budget (Feb) showed a greater than expected rise in the deficit to 231.7bn dollars when 229bn had been forecast and January's figure was 225.5bn

EUR

The euro recovered, following positive feedback from the E.U summit where Finance Ministers were meeting to agree the next step of the Greek bailout and discuss other peripherals' including Spain. The “final decision” for Greece was delayed, however, until Wednesday although Eurogroup Head Junckers was confident it would go smoothly and there was acknowledgement the country had now met all the conditions for the bailout. Spain was in the spotlight after it failed to meet its deficit reduction target in 2011 and then chose to relax the target in 2012 to 5.8% when E.U had set a target of 4.4%. Finance Minister Baroin of France and Schaeuble of Germany suggested Spain should make even deeper austerity cuts to meet the original target. Concerns that the success of the Greek PSI deal might trigger a series of copy-cat deals in other nations eased as after experts believed only Portugal was likely to pursue such a course. Overall the euro rebounded quite positively after the commentary on Greece. On the data front there was little of great importance although Italian 4th quarter GDP YoY came out slightly better than expected at -0.4% vs -0.5% expected and -0.5% previous, whilst the German Wholesale Price Index (Feb) fell to 2.6% as predicted.

GBP

Sterling weakened to its lowest level for 4-weeks on Monday as result of a mixture of dollar strength and growth fears pushed down investor appetite for riskier currencies. The pound fell versus the euro as the outlook for Europe improved following the recent successful Greek debt swap and the ECB's use of LTROs to shore up the region's financial entities. These seem to have created a successful double defence against credit and liquidity problems – although growth remains an unknown yet crucial variable. For the U.K, however, the poor Industrial Production -3.8% stat last week touched a raw nerve and kept the door firmly open to further Bank of England support. It now remains to be seen whether other data to follow supports or fails to corroborate current expectations. Trade data on Tuesday and unemployment data on Wednesday will be crucial in adding further colour and detail to the portrait. Today was rather thin on the data front with only a minor metric – the Lloyds Employment Confidence (Feb) – easing slightly to -69 from -73, although clearly pessimistic overall.

JPY

 The yen ended Monday slightly higher after risk appetite fell on China growth fears and lingering euro-zone debt contagion concerns. The Bank of Japan rate decision tomorrow is also widely expected to yield no change in policy after it increased quantitative easing in the previous month, and it is unlikely to raise it two months running. Data over the weekend was slightly better-than-expected, with Machine Orders (Jan) MoM rising by 3.4% vs 2.3% expected and -7.1% previous, and 5.7% YoY vs 4.4% expected; the Domestic Corporate Goods Price Index (Feb) MoM was up 0.2% as expected and 0.6% YoY; Consumer Confidence (Feb) fell to 39.5 from 40, when a rise to 40.5 had been expected. On the political front Noda's government's popularity ratings rose to 35% from 30% last month, with some claiming it was caused by a weaker yen. Noda said in commentary on Monday that the yen is “valued highly in relative terms when considering fundamentals,” and the Finance Minister Jen Azumi reiterated his tough stance on excessive speculation. There have been protests at the nuclear reactors reopening after their stress tests and future of the yen could be heavily interlinked with the political outcome of the debate over the future of nuclear power in Japan. Analysis prepared by: