Currency Report 24 March 2016

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EUR / USD 
The Euro continued to move lower on Wednesday, weakening for the fourth consecutive session, although ranges were again relatively narrow. Bundesbank head Weidmann returned to his more hawkish narrative and was more critical of ECB monetary policy than in recent weeks and stated that the bank had gone too far at March’s meeting.  US new home sales data was in line with expectations at 5.12mn for February from a revised 502,000. St Louis Fed President Bullard maintained his more hawkish tone in comments on Wednesday as he suggested that an April move to raise interest rates could be justified. He also commented that the risk of falling behind the curve had increased and he was increasingly uneasy over the use of ‘dot plots’ fed funds projections. The series of more hawkish comments from Fed officials this week has had a significant impact in shifting expectations surrounding tightening by June which has underpinned the dollar.  The Euro dipped to lows around 1.1160 before edging higher as potential sellers were again reluctant to short the currency heavily given recent episodes of aggressive short covering. There had been a widening of interest-rate differentials in the dollar’s favour into the European session, but this also faded and curbed further dollar buying. Durable goods and jobless claims data will be watched closely on Thursday for further evidence on economic trends as the Euro stayed below 1.1200.
JPY 
The dollar maintained a firm tone ahead of the US open on Wednesday and pushed to highs near 113.00 following further relatively hawkish comments from Fed officials. There was a retreat in equity prices during the US session and oil prices also dipped lower with a move back below the US$40 p/b level. There was also a significant retreat in US bond yields as the 10-year rate dipped to around 1.88% from 1.92% which undermined the US currency and the dollar dipped back below the 112.50 level.  There were reports that the Bank of Japan was focussing more on holding interest rates down rather than expanding the money supply. There was also a strong debate within the bank over the merits of negative interest rates with significant internal opposition, although the board composition has now shifted in favour of Governor Kuroda. There is strong evidence of capital outflows from Japan into European bonds, but these are being hedged against currency risks which limit scope for a weaker yen.  The dollar found support below 112.50 and edged back towards 113.00.
GBP
Sterling remained under pressure during Wednesday with the overall trade-weighted index at the lowest level for more than two years. There was further intense activity in the options market with implied volatility on three-month contracts at the highest level for close to six years.  A slightly more fragile tone surrounding risk appetite also tended to push the UK currency lower as commodity prices fell. The Euro moved above 0.7900 with a slide to below 1.4100 against the dollar.  There were further concerns that the June referendum could vote to leave the EU, especially with the government still in significant difficulties over fiscal policy. Although the latest ComRes poll continued to put the stay campaign ahead, the lead was at its narrowest since May 2015. The latest retail sales report will be watched closely on Thursday, with an expected decline after very strong gains for January. Although the overall impact should be limited given seasonal distortions, weak data would reinforce negative sentiment triggered by political developments.
Regards All.
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