FX news and analysis 19th Apr

USD

The dollar traded mixed on Thursday and was slightly down versus riskier currencies but doing better than most safety currencies. In the end, the much anticipated Spanish bond auction went off with more of a 'whimper' than a 'bang' despite all the hype and markets didn't react much to the event afterwards. The sales were mixed but interpreted as mildly positive because of the increased demand – however the demand was paid for with higher yields, which pushed the average 10-year coupon up to 5.73 from the 5.40s previously paid – and that isn't far from the 6.0% watershed mark. On the data front, employment figured highly and was mixed, with Continuing Claims (Apr 7) rising by only 16k when a 29k rise had been expected and Initial Claims falling by only 2k rather than the 18k expected. Existing Home Sales (Mar) fell to 4.48m when a rise to 4.62m had been anticipated, from 4.60m previously. The Leading Indicator fell by 4 basis points to 0.3% when 0.2% had been expected; finally the Philadelphia Fed fell to 8.5 when a fall to 12 from 12.5 had been expected.

EUR

 The euro broadly remained unchanged on Thursday after mixed results in a sale of Spanish 2 and 10-year bonds. Although demand was healthy, the yield for the benchmark 10-year rose from 5.403% to 5.743% although the yield on the 2-year bond actually fell to 3.463% compared to a previous auction in October where the yield had been 3.495%. Spain sold 2.54bn in total which was above the 2.50bn target. An auction in France led to similar results with demand remaining strong and all of the 10.5bn in debt being sold, but yields rising from 1.78% to 1.83% for the French 5-year bond. Overall the outlook remained pressured for the euro-zone after a report by the IMF highlighted the risks to stability in the region from the expected contraction of the balance sheets of European Bank's by as much as $2.6tr over the next 18 months. The phenomenon was illustrated by a recent report from the Bank of Spain showing how Spanish banks are carrying a record number of non-performing loans, and the write-down in moribund assets is likely to gather pace. Other data showed a fall in Euro-zone Consumer Confidence to -19.8 from -19.0, whilst Italian Industrial orders rebounded slightly on a seasonally adjusted basis.

GBP

 The pound continued to rise on Thursday although not as strongly as previously. There was no data out explicitly for sterling but the positive data from Wednesday provided the momentum for follow-through buying on the next day, which finally saw sterling parked quite securely over the 1.60 mark. The pound was supported by continued UK-positive comparisons with the euro-zone, due partly to the positive impression of the government's austere fiscal policies, and this led to safe-haven buying of gilts by investors fleeing the euro. The only problem I see possibly for sterling is that buyers may have jumped in a bit too quickly. There was one negative metric amongst all the positives of the last few days which concerns me and that is that, despite the rise in inflation, income is falling in the U.K. This may mean inflation will soon fall without the need for higher interest rates, so the BOE is unlikely to put them up. Given it is now also unlikely to increase QE as well, I see the most probable future position as one in which the BOE does nothing and sterling oscillates.

JPY

 The yen weakened on Thursday following a fall in the trade balance (Mar) to -621.3bn yen when a shallower -446.3bn fall had been expected, from the -321.4bn previously. His was seen as worrying for the economy. Exports rose to 5.9% in March but this was erased by a leap in imports of 10.5% YoY. On a seasonally adjusted basis Japan has been in a trade deficit ever since April 2011 and its deficit hit a record -4.4tr for the fiscal year ending in March. The yen fell heavily in January following the shock of the deficit in 2011, which was the first year since the 80's when it had not recorded a surplus. However, on the positive side exports did show a strong rise and it is the 4th consecutive month in which that has been the case. The deficit is mainly due to fuel which the country has to import because it has shut down all its nuclear reactors – and from particularly high Asian fuel costs. Yen may also have weakened because of buoyant risk appetite as riskier currencies remained remarkably well bid following not-as-bad-as-expected result in the much anticipated Spanish bond auction. The result eased tensions which had built up and helped boost sentiment.