FX news and analysis 5th Mar

USD

The dollar rose following a rise in risk aversion on global growth fears after President Wen Jiabao of China officially announced growth forecasts of only 7.5% in 2012 . This was the first time since 2008 that the forecast had been below 8.0% and was representative of more challenging economic climate. Riskier currencies immediately sold off as a result of the announcement. Worse-than-expected data from the euro-zone further impacted on risk appetite after the Composite Services PMI for February fell below expectations whilst there was further poor data from the U.K where Services PMI for Feb fell. The outlook lifted as the day progressed, however, and U.S data was better than expected with the ISM Non-Manufacturing Composite in February posting a 57.3 when a fall to 56.1 had been expected and 56.8 was the previous print. U.S Factory Orders did not fall as sharply as expected with a -1.0% level reported when -1.3% had been analyst's estimates and 1.10% the previous print.

EUR

The euro started the day lower but then recovered. Initially global growth fears and negative data dragged on sentiment and pushed riskier assets lower. The good feeling produced by the 3-year LTRO's last week which provided a short-term solution to the crisis faded as investor's turned their attention to the problem of growth instead. The Chinese Premier announced a surprisingly low 7.5% growth target for China which exacerbated speculation about a global slowdown. Further pressure came from reports in the German newspaper Der Spiegel which reported a source from the ECB as bringing into the question the likely participation of the private sector in the Greek debt-swap raising fears the plan might crumble at the last minute. There is no guarantee of participation which is entirely voluntary. There was a rebound in risk appetite towards midday after the release of Euro-zone Retail Sales showed a substantial upwards revision to 0.3% in January vs -0.5% previous. Other data was overall worse than estimated with Euro-zone Services PMI down to 48.8 vs 49.4 expected and Euro-zone Investor Sentix survey for March down to -8.2 vs -5 forecast and -11.1 previous.

GBP

The pound dipped earlier on on Monday but then recovered strongly as the day progressed. A mixture of global growth fears produced by the announcement from China that it only expected 7.5% growth in 2012 and generally poorer than expected data led to a fall in risk taking. Renewed Greek debt jitters also weighed. Concerns arose as to whether the PPI part of the debt-swap deal would be successful given participation is only voluntary. A failure to secure the cooperation of the private sector by the deadline on Thursday could produce a 'credit event' as it would endanger the whole edifice of the bailout deal – although cushioning from the ECB's LTRO's would limit the impact on financial institutions. Coming back to sterling, however, it lifted before midday as Euro-zone Retail Sales gave better than expected print and then later in the afternoon U.S data was also strong. U.K data was poor with Services PMI (Feb) falling to 53.8 – down from 56 in the previous month and a steeper fall than the 54.9 forecast.

JPY

The yen strengthened at first on Monday as a result of a mixture of factors including China growth disappointment, profit-taking in yen pairs - particularly the USD/JPY which had appreciated steeply in recent weeks – and concerns that the Greek debt deal might fall apart if the private sector did not take part. There was a reversal in sentiment later in the day and the yen gave back almost all of its gains. Better-than-expected euro-zone Retail Sales and U.S data kick started the recovery in risk and helped bolster risk appetite. Recurring concerns about the balance of trade, cost of importing oil – the price of which is forecast to go up - and the BOJ's ultra loose monetary policy all weighed. Dollar buying from Japanese importers also helped the recovery in the afternoon. Data from the COT Index showed large speculators where net short the yen and reinforced the recent reversal in sentiment. The outlook remained bearish for the yen in the short and medium term barring a major upset in the Greek bailout deal or some other part of the euro-zone.