Saturday, April 16, 2011

Forex Week in Review: April 10-15

This week the dollar had the ‘classic’ opportunity to rally aggressively. Global risk appetite has subsided, commodity currencies have softened and investors were willing to take profit. Instead, we have witnessed only a feeble attempt to rise.

Trichet and company’s hawkishness, mixed with the Fed’s dovish response to higher oil prices continue to make the EUR an increasingly attractive alternative to the dollar. With the Fed expected to now trail all other Cbanks when it comes to tightening, is putting the dollar near the bottom of the G10 carry trade league and up there with the classic funding currencies.

Expect the fears of a debt default and reserve diversification to weigh heavily on the global ‘reserve’ currency. Investors are demanding higher yield to account for that risk and QE2 has done a good job in keeping them artificially low. Asian Cbanks are keen to diversify their dollar denominated reserves into other currencies like the EUR, CAD or other higher yielding currencies.


  • French industrial production was in line with expectations at +0.4%, m/m, while Italian IP was slightly weaker at +1.4% vs. +1.7% consensus. This put the French y/y IP growth rate at a healthy +5.6% in Feb., and combined with last week’s strong German IP number, continues to point to robust industrial momentum in core-Europe. Irish IP, on the other hand, disappointed at -2.4% in Feb.
  • In Norway, CPI fell in Mar. to +1% from +1.2% y/y in Feb. Core-inflation was flat and relatively subdued at +0.8%, y/y.
  • UK CPI inflation was much weaker than the consensus expectation for a flat reading. It fell to +4% y/y in Mar. after rising to twenty-eighth month high of +4.4% in Feb. There was a sharp drop in food inflation, driving down the headline print, but core was also softer and the drop there was broad-based. BoE tightening expectations for the next 12-months has fallen from 75bp to 59bp.
  • BRC data saw UK retail sales fall -3.7%, y/y, in March (largest decline in 16-years). Higher oil prices, VAT and inflation, low wage growth and the prospect of further fiscal policy tightening likely weighed on consumer spending. Combining weaker than expected real economic data and the lack of a convincing hawkish shift from the MPC is pushing a BoE hikes further out the curve.
  • UK employment data again failed to impress. Claimant count rate was unchanged at +4.5% in Mar., with a small increase in jobless claims. Employment rose +143k in the Dec. to Feb quarter after the -69k drop in the Sept to Nov period, dragging the unemployment rate lower to +7.8% from +8%.
  • Press speculation on risks of Greek restructuring has caused European peripheral spreads to widen this week (Portugal, Spain and Ireland), reversing last weeks tightening. German finance minister Schaeuble said that additional steps will be taken if an analysis, expected in June, shows that Greek debt is unsustainable.
  • Ireland’s foreign-and local-currency government bond ratings were cut by two notches to Baa3 from Baa1 by Moody’s
  • Euro area HICP inflation was revised up to +2.7%, y/y, in Mar. from the +2.6% flash estimate. Core-inflation accelerated to +1.3%, y/y, from +1% in Feb. Continued price pressures in the Euro-zone should help reinforce the ECB’s rate hike expectations.


  • US trade gap narrowed in Feb. to -$45.76b, but by less than expected. The underlying details were weaker, as the pace of decline in imports outpaced that of exports.
  • The BoC stood pat on rates this week (+1%). Governor Carney has raised the Bank’s growth forecast for 2011 to +2.9% from +2.4% and predicted that the economy will now return to full capacity in mid-2012, six-months earlier than originally forecasted. The Governor is worried that the currency could weigh on growth and inflation, citing the loonie as a headwind to growth ‘twice’ in his statement.
  • US retail sales just missed expectations (+0.4% vs. +0.5%), but the underlying details were positive. The core-component (ex-autos and energy) posted another decent gain (+0.8%), suggesting that the improvements in the labor force are finally having an affect on consumer spending.
  • The Fed’s Beige Book reported that the US economy continues to expand at a ‘moderate’ pace from mid-Feb through Mar. They indicated that the weak job market was also doing better, with hiring still strong in manufacturing.
  • The BoC’s MPR details show that policy makers expect to gradually hike interest rates through 2013, while warning that the strong CAD could hurt exports and act as a drag on growth, as well as put added downward pressure on inflation through cheaper imports.
  • The number of people filing for US unemployment jumped +27k, w/w, to +412k, closer to the beginning of the year reporting when seasonal volatility impaired readings. Analysts are explaining the unexpected rise away to the effects of adjusting to a new quarter.
  • US producer prices grew at a slower pace in Mar. (+0.7% vs. +1.6%), even the growth in core-producer prices remain relatively subdued at +0.3%, m/m, reducing upward pressure on inflation.
  • Commodity price growth continues to weigh on headline inflation (+0.5%), with both food and fuel prices up further in Mar. Core-inflation (+0.1%) moderated on a monthly basis in Mar., highlighting once again that inflation is contained in the US.
  • Empire manufacturing index extended gains for the fifth straight month in Apr., posting a bigger-than-expected pick-up of +4.2pts to 21.7 (highest level in a year). Proof that that the US industrial sector is regaining momentum, and is supportive of general economic activity.
  • Headline US industrial output bounced back more than expected, up +0.8%, m/m, in Mar. The underlying details suggest broader strength.


  • Chinese imports hit a new all-time high of $152b, broadly matched by exports (just short of a record high). In the 1st Q, the dollar value of exports and imports were up +25% and +33%, y/y.
  • Japanese authorities indicated that they were lifting their assessment of the severity of the nuclear accident from level 5 to level 7.
  • BoK kept its policy rate on hold at +3.00% as expected.
  • PBoC continued to fix USDCNY to a new low each day all week.
  • MAS re-centered their exchange rate policy band upwards maintaining its hawkish stance. The decision should support market expectations of further SGD appreciation.
  • Japanese weekly portfolio flow data showed investors net buyers JPY176bn of foreign bonds and net sellers JPY161bn of foreign equities for net outflows of JPY16.9bn.
  • Strong Chinese growth and inflation numbers have revived concerns over further aggressive tightening by the PBoC. Chinese GDP was a solid +9.7%, y/y, in the 1st Q (consensus +9.4%). Inflationary pressures remain elevated, with CPI inflation rising to +5.4%, y/y, in Mar. from +4.9% in Feb.

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