Sunday, April 10, 2011

Forex week in review: April 3-8

The Market got what it wanted this week when it came to Central Bank announcements. The RBA, BoJ, BoE and ECB all remain mindful of inflation. The ECB tightened rates +25bp, seemingly to begin  its rate normalization policy. Their actions will provide greater forex directionality in the medium term for investors. The beginning of policy divergence between the Fed and ECB is negative for the dollar and with risk appetite back with a vengeance it seems the market cannot get enough of the ‘carry’ trade. The looser monetary policy’s of the Fed and BoJ is allowing their currency to remain favorable funding vehicles.


  • UK services PMI surprised with a sharp move higher to 57.1 from 52.6 in February (highest reading in 14-months). The composite PMI rose to 57.5 from 54.9, the strongest reading in over a year.
  • Euro area services PMI showed a very solid gain last month, rising to 57.2 (revised up from 56.9), the highest level so far in the recovery. Core strength comes from Germany, Italy and France. In the periphery, Spain’s services PMI fell to 48.7 and Irish services PMI fell to 51.1. Euro-zone composite PMI remains at a very high level, despite the moderation in manufacturing, and consistent with solid growth.
  • Moody’s cut Portugal’s sovereign rating to Baa1 from A3, with the negative outlook maintained.
  • Despite downgrades, Portugal successfully issued EUR 1.01bn in T-bills, slightly above the EUR 750mn to EUR 1bn range.
  • UK industrial production fell sharply in February (-1.2% vs. +0.4%, m/m), with January revised lower (+0.3%, m/m). The drop was mainly due to erratic items, the weakness will bias 1st Q GDP lower.
  • In contrast, German factory orders rose sharply in February (+2.4% vs. +0.5%, m/m) and with an upward revision to January (+3.1%).
  • Swiss inflation rose to +1.0%, y/y last month, pushed higher by energy and clothing components. Headline inflation is still benign compared to the SNB’s medium-term target of +2.0%, y/y.
  • It was not a surprise, pushed by higher funding costs, Portugal’s Prime Minister announced a request for financial assistance from the Euro-zone and became the third member to do so after Greece and Ireland.
  • Spain successfully sold €4.2bn of 3-year bonds. Perception is trying to decouple the Spanish markets from Portuguese stress to provided investors with greater comfort that peripheral financing stress is no longer a systemic threat or impediment to EUR appreciation.
  • German industrial production came in very strong (+1.6% vs. +0.5% in February), with growth in January revised up to +2.0% from +1.8%.
  • Not a surprise, the BoE left policy unchanged (+0.5%), as universally expected. Markets will have to wait for the release of the minutes on 20 April to gain insight on any possible changes in alignment within the divided MPC.
  • As expected ECB hiked the repo rate +0.25bp to +1.25%, which gives some directionality to the FX space. Trichet tone was marginally hawkish, his statement that the ECB would ‘very closely monitor’ risks to inflation suggests that the next rate rise could come as early as June. This is a significant step towards normalizing policy conditions in the Euro-area.
  • UK construction output (56.4 vs. 54.7) eases concerns about 1st Q GDP
  • UK PPI release showed inflationary pressures remained high in March. Output PPI rose to + 5.4% and core-PPI moderated only slightly to +3.0%. Market continues to prices in an 80% chance of a +25bp hike by the July meeting.


  • BoC’s Canadian business outlook survey sees slow growth on a higher loonie and commodity prices. Inflation expectations have ticked higher and respondents now expect inflation to trend at the upper end of the BoC inflation control target.
  • US data showed that the service sector is expanding at a ‘moderate’ clip. ISM non-manufacturing index eased to 57.3, but still remains above its long-run average of 53.8. Respondents are concerned of a possible spillover effects from Japan, specifically with the supply chain.
  • There were no surprises from the FOMC minutes. The meeting highlighted the dichotomy amongst the members on timing of exit. This certainly evident from the independent rhetoric jousting of late by various Fed speakers. The minutes reiterated that the FED would be hands off with QE2.
  • US jobless claims extending their ‘modest’ downward trend, beating consensus estimates by-10k (+382k vs. +392k). Since peaking two-years ago, down over +40% from the high, claims continue to hover within a tight range below that psychological +400k print which points to a ‘gradual’ pace of hiring activity.
  • Canada employment figures showed a disappointing flat headline reading (-1.5k). The details were more encouraging, with full time employment rising by 91k, and part time declining by an equivalent degree. Unemployment rate falls to +7.7%
  • US inventories increased +1% in February, driven by a big gain in petroleum amid rising oil prices


  • In Australia, job ads were up another +1.3%, m/m in March
  • The RBA left policy rates on hold at +4.75% with the statement nearly identical to last month’s. There was an additional sentence on Japan and oil prices, and a slight change in language around the labor market commentary from ‘firm in 2010’ to ‘growth moderated’. The level of yields is still the highest in the G10.
  • PBoC hiked policy rates +25bp. Analysts expect China to keep policy rates and banks’ RRR unchanged for the next two months as evidence is mounting that policy tightening is biting into lending and consumption.
  • Australia employment rose +37.8k in March and the February fall in employment was revised from -10k to only -8.6k. The unemployment rate eased from +5.0% to +4.9%. RBA considers this to be full employment.
  • The Bank of Japan left key policy rates and its asset purchase program unchanged, disappointing those looking for new support measures. Policy makers revised down their economic assessment, and this to the provision of reserves in the banking system allows the Yen to be an attractive funding currency in this pro-carry environment.

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