Risk currencies boosted and USD retreats as Spain and France announce austerity measures

Tom Tong28/Sep/2012Currency Updates

GBP

Yesterday we saw a three week high against the euro for the pound despite receiving a mixed message from economic data released from the Bank of England. The current account deficit came in larger than expected whilst the revised Q2 GDP figures came in and showed a slightly smaller contraction of the UK economy than expected.

That is most likely what boosted the pound yesterday; the report showed a mere 0.4% contraction after revisions from the 0.5% figure previously reported and Bank of England policy-maker Paul Fisher was quoted as forecasting in a interview “a very strong gross domestic product number” in the third quarter. On the other hand, SEB analysts said sterling should be sold off against the dollar given the British economy was “showing few signs of recovering” and the likelihood of more BoE quantitative easing.

While this helped the pound, the market was focused on uncertainty over Spain, its budget, and whether the government may seek a bailout or not, and thus could dent investor appetite for taking on risk and threaten the pound bearishly against the dollar.

The markets seemed to like the proposed reforms and budget plans disclosed by Spain and and we saw an increase in risk appetite in the markets which may also have helped the pound to reach its high.

There is no significant data to be released in the UK today so the the pound’s movements today will be determined by echoes and risk appetite.

EUR

As mentioned, the markets responded positively to Spain’s plan for it’s 2013 budget and the Spanish benchmark 10-year yield dipped back below the 6% level. Spanish leaders plan to slash their budget deficit from 9% to 4.5% by taking on harsh austerity measures. However, the good news is that they are not going to rely too heavily on tax hikes. Instead, they’ll be cutting back on government spending. Bear in mind taxes have already been hiked up a with the recent increase in VAT.

Some of the main features of the Spanish plan included a 8.9% cut in government spending in 2013 and a increase in sales tax is expected to raise tax income by EUR 5b to EUR 17.5b.

Greece’s coalition government also agreed a plan to cut spending over the next two years by EUR 11.5b. Finance Minister Yannis Stournaras said that the agreement gives him a basis for “stronger negotiation” with the international creditor for easing the conditions on fiscal reforms.

Today, we have German retail sales which came in slightly worse than expected early this morning and then the European central bank is due to release it’s YoY CPI which is anticipated to decline slightly from 2.6 to 2.4%.

USD

The U.S. economy remains shaky, with threats looming at home and abroad. With evident risk appetite in the market yesterday in combination with weak US data, we saw a bearish greenback yesterday. The US economy’s position was undermined by a number of reports released yesterday. Orders for durable goods (long-lasting manufactured products such as cars and televisions) stumbled 13.2% in August from July, the biggest monthly drop in more than three years. Much of the decrease came in orders for commercial aircraft; it’s a volatile industry in terms of orders but the report nonetheless provided new evidence that the once-robust factory sector is struggling to remain consistent.

Inn addition, the revised Q2 GDP figure for the US was also released yesterday, which came out surprisingly much lower than expected. The US now propels itself at a slower rate of 1.3% growth rather than the 1.7% initial reading.

To finish off the bad news, pending home sales data disappointed as well with a downside surprise, declining 2.6% in August; significantly worse than it’s -0.4% expectation.

On the other hand, the initial jobless claim report, which is a high tier data set, came in on the up side, better than expected and it’s best improvement since July. However, in the midst of negative reports and risk-on effects, it seemed to be ignored relatively by the markets.

For the greenback there is a mixed bag of medium tier data to be released today; Core PCE Price Index and Chicago PMI are the reports that are most likely to cause any movement today.

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Written by Tom Tong

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