FX News and Analysis: March 21, 2012

USD

The dollar fell in the early morning after the news that the Greek parliament approved austerity measures tied to the terms of the second bailout. Later the dollar recovered, however on less dovish commentary from Minneapoliss Fed President Narayana Kocherlacota who argued that the FOMC should conclude its easing cycle and look to start normalizing monetary policy later in 2012 in line with the more robust economic outlook. The dollar further gained as a result of a rise in risk aversion after the release of a lower than expected print in Existing Home Sales, which fell by -0.9% when a rise of 0.9% had been expected in February, however, with the proviso that the January figure was revised up to a 5.6% print. MBA Mortgage Applications were also down by -7.4% - a much steeper fall than the -2.4% previous print. Overall the outlook for the housing market remained subdued, however, despite signs of an upturn in employment because of a corresponding pressure on wages. 

EUR

 The euro rose in the early part of Wednesday after the Greek parliament approved the latest batch of austerity measures required as a pre-condition by the E.U before lending the country the 130bn of bailout money. Later the euro weakened, however, as risk aversion set in partly from poorer data in the U.K which showed an increase in public spending and also in the U.S where Existing Home Sales fell by -0.9% when they had been expected to rise by 0.9%. China growth fears from Tuesday’s news also continued to weigh as they spurred equity selling on fears of a global economic slowdown. The euro took a further tumble after investor service Moody’s warned of multiple downgrades within the E.U and countries being forced to leave. In his speech yesterday Fed Chairman Ben Bernanke praised efforts by E.U countries to fight the debt crisis in the region but also said that there remained a risk of contagion for U.S businesses and urging E.U policymakers to pump more money into the system – however after a 1 trillion infusion via the LTROs its difficult to see how this would be plausible. On the data front Wednesday was a light day with no major releases for the euro-zone.

GBP

The pound traded mixed on Wednesday - falling at first because of the release of doveish BOE minutes and higher than expected public spending – but then recovering after the Budget maintained the focus on austerity. The BOE minutes showed that 2 members of the monetary policy committee voted for an increase in asset purchases of 25bn more, these were David Miles and Adam Posen. Data out at the beginning of the day weakened sterling initially, after it showed an increase in Public Sector Net Borrowing (Feb) which rose to 12.9bn pounds when only a rise to 5.0bn had been expected and January’s figure clocked a fall of -10.2bn. Public Finances (PSNCR) (Feb) – which is the amount of money financed to the U.K government - did fall by -7.8bn and -1.0bn expected but this was less than the previous month’s -32.0bn print. Finally on this score, Public Sector Net Borrowing (Ex Interventions) also increased substantially to 15.2bn when it fell by -7.9bn in the month before.

JPY

The yen strengthened on Wednesday after renewed risk appetite following widespread falls in equity markets after concerns China and other emerging economies were entering a new recessionary cycle phase, which could lead to a slowdown in the global economy. It began the day weaker against most counterparts but then started to rise versus them all - mainly because news and data weakened them rather than ceause of a fundamental shift in outlook for the yen itself. The euro was weighed by concerns over lack of liquidity after lacklustre demand in peripheral bond auctions ignited fears that banks were not lending despite borrowing over a trillion euros in cheap 3-year LTROs recently. Risk appetite was further hit by comments from Moodys and Fed Chairman Ben Bernanke yesterday. The pound, meanwhile was weighed by higher-than-expected public borrowing and an especially doveish BOE minutes from the March meeting. The yen is recovering a little, but it still remains broadly under pressure because of BOJ ultra-loose policy stance.