There will be some optimism over a very slow improvement in the economy as production looks to recover from the earthquake-induced shock. The yen should be more vulnerable to selling pressure when risk appetite improves, especially as the underlying fundamentals remain precarious, but the currency is proving resilient. There will be protection from weak fundamentals elsewhere and there will also be the threat of capital repatriation as underlying confidence in the Euro area will remain weak. The yen should be able to resist heavy selling.
The dollar found support on dips to the 80.25 area on Thursday and rallied strongly during the US session with a high near 80.85. There was a further rise in US Treasury yields which helped underpin the dollar, although it was due in part to disappointing US Treasury auctions rather than confidence in the economic outlook, although the Chicago PMI release did provide some relief.
There were expectations that there would be increased capital outflows from Japan with the launch of new investment funds. There was also a general recovery in risk appetite, but the Japanese currency was generally resilient despite the potential for speculative capital outflows.
The quarterly Tankan survey was weaker than expected with a decline to -9 from 6 previously while there was a 1.9% decline in household spending. In contrast, the unemployment data was stronger than expected with a decline to 4.5% from 4.7%.
Sterling:
Confidence in the economy will remain weak with further concerns over the outlook for consumer spending, especially with credit availability still depressed. Given economic vulnerability and weakness within the banking sector, the Bank of England will not be in a position to raise interest rates significantly and real yields will remain very unattractive which will limit Sterling support. There will be doubts over the government’s fiscal policies and pressure for policy reversals will increase if there is further disappointing economic data. Any improvement in risk appetite could provide some degree of Sterling relief.
There were reports of further Bundesbank Euro/Sterling buying ahead of the month-end and there was also corporate Euro demand. This selling pushed the UK currency to a 15-month low on a trade-weighted index and beyond 0.90 against the Euro.
There was no revision to the first-quarter GDP data, in contrast to some hopes for an upward revision while the current account deficit narrowed to GBP9.4bn for the first quarter of 2011 from a revised GBP13.0bn previously.
In the Bank of England testimony on the inflation report and monetary policy there was a wide range of comments during the hearings and there will certainly be the threat that divisions will intensify over the next few months.
The underlying message was that interest rates would remain very low. MPC members were also keen to play down the possibility of any further quantitative easing with Governor King stating that further bond purchases could be seen as taking the easy option. The comments did help curb more aggressive Sterling selling.
The latest Bank of England credit-condition survey reported that consumer lending standards were set to tighten further during the third quarter which maintained fears over the consumer spending outlook, especially with lending levels already at historically low levels. There was also a renewed deterioration in consumer confidence according to the latest GfK index. |