FX news and analysis 19th Mar

USD

 The dollar traded lower on Monday after figures showing subdued inflation on Fridasy undermined hopes that the Fed might raise interest rates, with the concern overspilling into this week as the prospect of ultra-low rates till 2014 once again reared its head. Commentary remained on the hawkish side, however, and offset some of the damage form the weak CPI, with New York Fed's Dudley saying he thought rates could go up before the 2014 forecast. As a result of the 10-year Treasury yield did rise 3 bps and the dollar firmed up temporarily, however, it gave back gains eventually. On the data front, Chinese data showed a slowdown in property price index from 53 to 37 but slowdown fears eased after commentary from RBA Governor Glen Stevens in which he talked up the outlook for China – particularly long-term - dismissing short-term correction as “Some slowing” needed to “reduce inflation.” Stevens also said he expected Chinese GDP to equal U.S in a decade and euro-zone within a couple of years. U.S economic docket was slim with NAHB Housing Market Index remaining unchanged at 28 when a rise to 30 had been expected.

EUR

The euro rose strongly on Monday, partly as a result of commentary form the RBA governor Glen Stevens, who talked up the future of the global economy by forecasting continued growth in China – the world's economic powerhouse. Apart from that, the single currency benefited from a general weakening of the yen and the dollar on loose monetary policy concerns. Data was overall poor but this didn't seem to dent investor enthusiasm for the euro. Euro-zone Current Account (Jan) n.s.a showed a fall to -12.3bn vs 18.3bn previously and 4.5bn on a s.a basis compared to 3.4bn previously. Italian Industrial Orders (Jan) MoM fell by -7.4% vs -3.2% expected and 5.2% previously; YoY they fell -5.6% vs -2.9% estimated and -4.3% previous; Italian Industrial Sales fell by -4.9% vs -3.2% previously; YoY they fell by -4.4% vs -5.4% previously; Euro-zone Construction Output (Jan) MoM s.a fell by -0.8% vs -1.9% in December; on a YoY and w.d.a basis the same stat fell by -1.4% against a 9.8% rise in the month before.

GBP

 Sterling rose steeply continuing its rally from the previous week after risk appetite appeared to revive on a generally more positive global economic outlook, spearheaded by commentary from RBA governor Glen Stevens talking up the future of China. Sterling also benefited from a revised outlook for the U.K economy which they saw as having better prospects for growth and less probability of further BOE easing in the future. A 'Budget effect' may also have supported sterling with investors betting on a positive market reaction to the Budget Statement on Wednesday, as it is expected to maintain pressure on public spending. Increased volatility on pound pairs is to be expected in the run up to the both the Budget and BOE minutes on Wednesday. BOE minutes may be expected to reveal a less doveish bias as globally inflation expectations seem to have risen slightly and the same may be true for the U.K. Tomorrow's CPI release will be crucial in this respect as it will prep the market for the minutes the day after.

JPY

The yen had another mixed day, rising versus the greenback as inflation expectations took a blow after the U.S core CPI result fell below expectations on Friday – but falling against the yen and the euro after the BOJ's ultra-loose monetary policies weighed and compared doveishly to tighter policy in Europe. The U.K benefited from a pre-Budget day bounce as investors are expecting the Chancellor to announce further curbs to public spending on Wednesday, which investors will like as it reduces the U.K's debt burden. There were also expectations of a less doveish BOE minutes and so less chance of more QE. The yen faces new headwinds, such as an increasing reliance on fossil fuels with large public distrust of nuclear energy post-Fukushima, this adds a costly sum to the Current Account. Japanese exports have also suffered from a strong yen and global slowdown, but this is an easier problem for the country to solve as the yen is weaker now and new markets are opening up in BRICS countries and China for example which they can export more to. Japan's Corporations remain resilient global entities with formidable strength and depth so there is potential for adaptation and a rebound in exports.