FX News and Analysis: March 20, 2012

USD

The dollar rebounded on Tuesday as a result of a sudden rise in risk aversion due to pessimistic growth forecasts for China. Despite governor of the RBA Glen Stevens's comments yesterday which broadly talked up the future growth of the Chinese economy negative news and data increased concern on Tuesday. The announcement by China's National Development and Reform Commission that it was raising domestic retail energy prices increased concern that higher energy prices would drag on the economy. Separately a BHP Biliton Executive said that China's demand for Iron ore was 'flattening out' whilst a Rio Tinto executive also expressed concerns about growth. The China Association of Auto-mobile Manufacturers said that vehicle sales will miss the 8% growth target this year and could even be below 5%. Recently WenJibao announced an official growth target for 2012 of 7.5% - the first time in many years it had fallen below 8% and a sign of muted growth. Data meanwhile showed Building Permits in February increased above expectations to 717k vs 686k expected and this was 35k more than the previous month. Housing Starts, however, fell 2k below estimates, to 698k, which was 8k below the previous month.

EUR

The euro fell after increased liquidity concerns following lower than expected demand in a Spanish bond auction on Tuesday; whilst the sale drew the lowest yields in 2 years, demand fell below the 5.5bn target to only 5.04bn. This was despite a second round of 3-year LTROs from the ECB, which lent a total of a trillion euros to banks across the euro-zone in the last 6 months. The lacklustre demand on Tuesday showed that banks were still reluctant to lend, despite borrowing the ultra cheap ECB money. The sale was seen as a disappointing and led to a fall in some euro pairs. General risk aversion also pushed down demand for cheaper assets after news from China forecast lower growth. On the data front German Producer Prices (Feb) MoM fell by 2 basis points to 0.4% from 0.6% previously, and 0.5% expected; Year-on-year they also fell by 2 bps to 3.2% vs 3.4% - although this was in line with expectations.

GBP

The pound was weaker overall, falling versus the euro and the dollar but rising against the weakening yen. The strange thing about price action on Tuesday was that U.K CPI data actually came out above expectations, and might have been expected to spark a rally in the pound under normal conditions – however for whatever reason – perhaps because of the overall fall in inflation - that was not the case. CPI (Feb) YoY fell to 3.4% - a basis point above the 3.3% expected – but still below the 3.6% previous. The Month-on-month statistic showed a strong rise of 0.6%, which was higher than the 0.4% expected and much better than the -0.4% of January. The RPI was similar with a February RPI at 3.7% vs 3.9% in Jan, although higher than the 3.5% previous print. Again MoM showed a strong rise of 0.8% when a fall occurred in the previous month. Other data showed CBI Trends Selling Prices rose to 24 vs 13 expected and 10 previous; CBI Trends Total Orders fell to -8 – a deeper retrenchment than the -5 expected and -3 previous. Tomorrow will be a busy day for UK data with both the U.K's annual Budget statement and the minutes form the BOE.

JPY

Further news of more easing from the BOJ continued to weaken the yen on Tuesday despite a positive review of central bank policy from Moody's investor service. The BOJ is lending a trillion yen to banks and businesses in an effort to increase the flow of liquidity in the system. The currency has fallen for 6 straight weeks against the dollar after the U.S currency strengthened on lower quantitative easing expectations and the yen fell as a result of a surprising Current Account deficit due to higher import costs from having to buy its energy abroad following the closure of its nuclear power plants. There are now fears that repayments of the country's huge debt mountain – over 200% of GDP – which is much higher than the Greek debt ratio – may catch up and cripple the economy. Nevertheless a very robust export base and strong corporations are still a factor in Japan's advantage. However, slowdowns in BRICs countries which seem to be going through their recessionary cycles later than the West could hit Japan's new export markets. Although the U.S is strengthening and may continue and provide renewed opportunities for growth there are still fears ?that a further slowdown and continued higher oil prices could force a squeeze on the Japanese economy resulting in an even weaker yen.