FX News And Analysis: March 27, 2012

The dollar rose marginally on Tuesday following lower than expected data which showed House Prices falling to the same levels they were at in 2003. The S&P/Case-Schiller Home Price Index (Jan) fell to 135.46 vs. 135.80 expected and 15 basis points below the previous month's print.

Poor Consumer Confidence - which fell to 70.2 from 71.6 previous – also weighed on risk appetite and spurred demand for the dollar, although gains were muted by the fact that the result was still slightly above expectations. Dollar buying was also offset by increased expectations of further quantitative easing (QE) following a speech to the National association of Business Economics by Fed Chairman Ben Bernanke. In the speech he reiterated concerns already voiced about the enigma of how jobs were being created in a sluggish climate and his concerns that there were still high levels of long-term unemployed and the lower number of hours being worked.

He said the economy would need an extra boost to sustain the current uptrend in job creation. However, a less dovish speech, Fed Reserve New York's Bill Dudley said the U.S economy was growing at a 'moderate pace' despite considerable global economic risks to the downside, offset the losses marginally.

EUR

A fall in risk appetite impacted adversely on the single currency on Tuesday after it was dragged down, initially by China data, and then by lower than expected data from the United States.

Industrial Profits YTD YoY (Feb) in China fell by -5.2% - a dramatically lower print than the 25.4% print previously, raising simmering concerns about the impact of a contraction on global economics. In the U.S, meanwhile, lower-than-expected Consumer Confidence and continued weakness in the housing market also weighed, despite further dovish commentary from Fed Chairman Ben Bernanke.

Markets were further disappointed after a poorer-than-expected result in a Spanish auction of 3 and 6 month bills, in which less than the target amount was sold, underlining the limitations of the second long term refinancing operation, which didn't seem to work its magic this time. As if in answer to the problems raised by the failed auction, the OECD in report on the euro-zone, said that it thought the ECB might need to try other types of QE which also weighed on the euro. There was lots of talk about the size, form and remit of the euro-zone bailout fund in the run up to the next euro-zone summit on Thursday where these ideas will be developed further.

GBP

The pound ended the day down on Tuesday after risk appetite fell following a roll-call of poor data from all around the globe. Although cable made new quarterly highs above 1.60, temporarily, the exchange rate fell afterwards forming a shooting star candlestick pattern towards the end of the day. Sterling may have been weighed by commentary from Monetary Policy official David Miles who said that the U.K economy had stagnated, thus leaving the door open to further monetary easing from the BOE.

On the data front, CBI Reported Sales (Mar) fell to 0 when -5 had been expected and -2 was the previous month's print. Tomorrow sees the release of the last of the GDP 4th quarter revisions which is expected to remain unchanged at 0.7% YoY and -0.2% QoQ. Data is also expected to show a contraction in the U.K's Current Account Deficit to -8.4bn and a slight improvement in Business Investment to -1.9% from the -2.0% previously.

JPY

The yen weakened on Tuesday despite a fall in risk appetite as QE concerns and the use of the increasingly popular yen to fund the carry trade were factors which negated the increase in haven demand from investors fleeing risk. There was no data on the economic docket so the yen was affected by outside forces.

The dollar rose slightly on safe-haven demand and although the euro remained under pressure it had some strong phases during the day when investors' appetite for risk was momentarily lifted, such as following Ben Bernanke's speech to the National association of Business Economics, during which he hinted at more QE. Data tomorrow is expected to show a continued fall in Retail Sales, with Large Retailer's Sales (Feb) falling by -0.3% versus -1.2% expected and Retail Trade YoY falling 4 basis points to 1.4% versus 1.8% previous; meanwhile Retail Trade s.a (MoM) (Feb) is expected to fall to 0.0% versus 3.1% previous. If the data comes out even worse than the lower prints expected above, the yen may well sell off as expectations of more BOJ easing weaken the currency.