Currency Outlook 9 March 2016

The Euro retained a firm tone during Tuesday with support just below the 1.1000 level, but hit resistance above 1.1050 during the US session as longer-term funds looked to sell rallies. The currency drew some support from stronger than expected German industrial production data with a 3.3% monthly gain, although ECB speculation tended to dominate.   There was a weaker than expected reading for the US NFIB small-business confidence index at 92.9 from 93.9 previously and the lowest reading for two years. There was, however, evidence of rising wages with some squeeze of margins as companies struggled to raise prices. Political uncertainties were also quoted as a reason to postpone expansion plans. There was no further improvement in the dollar’s yield spreads over German bunds which stifled further US buying during the day and the Euro gained some net support from a weaker tone in risk appetite. There was further caution ahead of Thursday’s ECB meeting with a notable uncertainty into the decision given the huge position squeeze following December’s rate decision. Markets alternated between the potential for another ECB disappointment which could push the Euro sharply higher and the possibility that the bank would be more aggressive and potentially push the currency sharply lower. The latter view gained some traction on Wednesday and the Euro retreated back below the 1.1000 level with markets braced for high volatility following Thursday’s rate decision and press conference.
The dollar was unable to make any impression on the yen during Tuesday and retreated to test support below 112.50 during New York trading. The yen secured defensive support from an underlying deterioration in risk appetite while the dollar was hampered by a significant decline in US bond yields during the day with 10-year rates below 1.85%. There were further concerns surrounding Abenomics amid fears that earnings growth would remain very weak and reinforce Bank of Japan difficulties in executing further monetary easing, especially at March’s meeting.  The Nikkei index remained on the defensive on Wednesday which curbed potential yen selling, although there was solid dollar buying on dips with net capital-account trends still negative for the Japanese currency as the US currency struggled to hold above the 112.50 area while the Euro dipped to lows below 123.50.
Although Sterling was able to maintain the bulk of recent corrective gains against the dollar, it was unable to extend gains and dipped back to test support below 1.4200 and also dipped to near 0.7800 against the Euro before recovering ground. Sterling was hampered by a weaker tone in risk appetite during the day. In a Treasury Select Committee hearing on EU membership, Bank of England Governor Carney again warned that any vote to leave the EU would risk damaging the economy and Sterling and was then accused by some members of the committee of having a pro-EU bias which Carney rejected. There were no comments on monetary policy during the hearing. MPC member Weale stated in a speech that it was still appreciably more likely that monetary tightening rather than easing would be required over the next two years, but he also commented that the bank did have room to ease policy if the inflation outlook deteriorates, illustrating the shift in internal debate which has taken place. Sterling held steady on Wednesday with underlying selling pressure still more subdued despite fragile risk appetite.
The Euro  dipped to lows near 1.0920 during the European session on Tuesday before rallying to end little changed near 1.0965 while the dollar found solid support near 0.9900. The franc was unable to gain sustained support from a more fragile attitude towards risk. Swiss consumer prices rose 0.2% for February compared with expectations of a further small decline and there was an increase in the year-on-year rate to -0.8% from -1.3% previously as sharp price declines last year started to come out of the calculation. The data should ease National Bank deflation fears at least to some extent.
Regards All.

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