Markets settle following drama of last week

Tom Tong18/Sep/2012Currency Updates

USD

Yesterday we saw the dollar regain some of the ground it emphatically lost last week. The dollar index rose 0.1 per cent after falling to a four-month low following last week’s announcement of a third round of quantitative easing.

Risk assets in general fell back slightly as some of the early optimism of last week faded. This may have been expected given the exaggerated moves of last week, and can even be attributed to profit-taking. Others are attributing the waning optimism to renewed fears that a rally inspired by quantitative easing could traditionally lead to inflation problems. The benchmark indicator of inflation expectations are US break-even rates, and US five-year break-evens have now reached 2.30 per cent, just 15bp below the four-year high.

Further dampening sentiment, yesterday saw the lowest reading since April 2009 for the New York Fed’s Empire State manufacturing survey. This was a subtle reminder that growth in the US was still stuttering.

The dollar also rose 0.4 per cent ahead of two-day meeting by the Bank of Japan. There is speculation the BoJ could follow suit and announce monetary easing measures, aimed at preventing excessive yen strength which has been hitting exports.

EUR

After making initial gains, the euro went on to fall roughly 0.2 per cent against the dollar. Following last week’s announcement by the ECB for unlimited bond-buying of peripheral sovereign debt, we have seen the euro rally significantly across the board. However, it has started to settle within a new range as early optimism was stunted by anti-austerity protests in Madrid over the weekend. On the other hand, many analysts are claiming that yesterday’s retreat of the euro was simply “a sign of a technically healthy market”.

The euro rose 0.4 per cent against the yen amid speculation of Bank of Japan monetary easing.

Today we will see a major test for the euro at these levels with the monthly German and Eurozone ZEW Economic Sentiment. Many investors believe the downside risks for the euro remain firm, with any major delays from Spain and Italy in requesting a bailout likely to weigh on the currency.

GBP

Yesterday the pound managed to outperform the euro, slightly breaking its mould as a low-beta version of the single currency. Sterling rose 0.3 per cent against the euro, whilst also rising 0.3 per cent against the dollar hitting its highest level since April.

This morning, CPI figure come out, which will give us a key indication of UK inflation and how in-line it is with expectations. Expectations are for CPI to fall to 2.5%, after being 2.6% last month. Anything lower than expected could boost the pound further.

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Written by Tom Tong

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