#FX 9 February 2016


Monday trading conditions following the US employment data is often very subdued, especially with a lack of economic data releases, but the pattern this month defied normal expectations as volatility spiked higher during the day. Although there was a slightly larger than expected dip in the Sentix Euro-zone business confidence index to 6.0 for February from 9.6, financial-market trends dominated. There was a sharp decline in Euro-zone equity markets with a notable loss of confidence in the banking sector amid fresh concerns surrounding the outlook for Deutsche Bank. Concerns surrounding the Greek situation continued with some rumours that a bond payment could be missed and no improvement in economic fundamentals with doubts whether fiscal targets can be agreed. There were also further concerns surrounding the EU migrant crisis which risks undermining cohesion within the Euro-zone as well as creating severe tensions within the EU as a whole and risk escalating financial pressures.  There will be further pressure on the ECB to sanction a further aggressive monetary-policy easing, but any move to cut the deposit rate even further into negative territory would also have an adverse impact on the banking sector. Council member Coeure stated that the bank would do more if required to get inflation higher. There was only sparse US data with a further small improvement in the labour-market conditions index. The Euro initially dipped to lows below 1.1100 against the dollar despite the deterioration in risk conditions, but then recovered strongly to highs above 1.1200 and held firm on Tuesday.

The dollar was unable to gain any traction against the yen on Monday and retreated sharply during the day as a whole. The sustained deterioration in risk appetite was important in triggering renewed defensive demand for the Japanese currency as global equity markets fell sharply. There was further support at the US open as the Euro broke below 130.00 against the yen. There was also a fresh decline in US bond yields with 10-year rates dipping to 12-month lows below 1.75% which further undermined US support. In this context, the dollar dipped to 15-month lows below 115.50 during the New York session. After a brief respite, risk appetite deteriorated further in Asia on Tuesday with heavy equity-markets selling as the Nikkei index fell by over 5%. There was also a further downward move in yields with 10-year rates moving below zero. The yen gained further defensive support as the dollar dipped to fresh 15-month lows below near 114.25 before a slight recovery. Finance Minister Aso stated that forex moves had been rough, but there was no evidence of actual intervention.
Sterling was back on the defensive during Monday with a retreat to one-week lows against the dollar while it also declined to re-test one-year lows beyond 0.7750 against the Euro. There was a deterioration in global risk appetite which had a significant negative Sterling impact, especially given the focus on the domestic financial sector. With the UK running a sizeable current account deficit and a tight fiscal policy, there were further concerns surrounding international financing. There was stronger data from the BRC retail sales report with a 2.6% annual gain which suggests solid spending. There were further political concerns surrounding a likely EU referendum vote, especially with migration pressures within Europe tending to intensify.  The UK retreated to fresh 12-month lows around 0.7780 against the Euro on Tuesday as risk appetite deteriorated further with unease over UK fiscal prospects also a significant factor.

Regards All



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