Dollar sell-off continues as risk assets rally again following successful EFSF bond sale

Tom Tong10/Apr/2013Currency Updates

GBP

Yesterday sterling pared back the decline from the previous day against the dollar advancing close to last week’s high, as the fundamental developments coming out of the UK encouraged an improved outlook for growth. Indeed, U.K. manufacturing increased 1.0% in February versus forecasts for 0.4% print, while industrial outputs climbed 0.8% after contracting a revised 1.9% during the prior month.
However, another report revealed that UK Goods Trade deficit widened to £9.4 billion in February, from £8.168 billion in January, exceeding expectations for a smaller gap of £8.550 billion. Even so, the FTSE 100 traded up a narrow 0.58%.
Today there is a lack of macro data out of the UK, and as such the pound is likely to trade at a tight range as market participants are far more concerned about debt troubles in mainland Europe and the maintenance of ultra-accommodative policies from the Fed and Bank of Japan.

EUR

The euro increased to a three week high as the European Financial Stability Facility sold 8 billion euros of five year, 0.875% bonds with an impressive demand that released a bid to cover ratio of 2:1.
Market participants took positively to Spanish Prime Minister Mariano Rajoy comments, who stated that the EU should consider revamping the European Central Bank’s (ECB) mandate, while Economy Minister Luis de Guindos argued that the Governing Council should introduce measures to address fragmentation of the capital markets as the euro-area remains in recession.
With regards to sovereign ratings, Moody’s has affirmed its negative outlook on Spain’s Baa3 rating and highlighted elusive deficit targets as the main reason. For Portugal, S&P has found no immediate ratings impact from the constitutional court decision last Friday, while recognizing the potentially adverse impact of this development. Portugal is rated BB/Stable by S&P.
Yesterday Wolfgang Schauble, the Finance minister of Germany, met U.S. Treasury Secretary Jacob Lew, who encouraged Schauble to adopt policies that foster consumer demand as the outlook for growth remains weak in the Eurozone.

USD

The US dollar Index plunged yesterday and consolidated above it’s 200 day moving average, as sentiment in the market remained “risk on” and demand for riskier assets such as euro and Stocks climbed. The S&P, Nasdaq and Dow Jones all closed marginally up.
An important bundle of macro data will be released today on the other side of the Atlantic. Within debt markets, the US Treasury will serve a 10-Year Note Auction, expecting a lower rate from its previous 2.029%. The Monthly Budget Statement for March expected -112.5B from its previous -203.5B but the most important is the FOMC Minutes, in which as growth and inflation picks up (despite the isolated last Non-Farm Payrolls figured that showed only 88K) a greater number of Fed policy makers are likely to adopt a more hawkish tone for monetary policy, reducing its ultra-accommodative monetary policy called QE3.

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Written by Tom Tong

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