FX news and analysis
The dollar rose on Friday after a higher than expected Non-Farm Payrolls (NFPs)print helped strengthen the outlook for the U.S economy and reduced the probability that the Federal Reserve would have to print more money to help drive growth. NFP's showed a 200k rise in hiring in December versus the expected 150k, and was substantially higher than the previous 100k level (revised down from 120k) for November. The print supported the great expectations evoked by the surprise rise in Thursday's ADP Employment Change. The Unemployment Rate also fell a bps from 8.6% to 8.5% - and was 2 bps below expectations. More sobering commentary from several key Fed officials, however, offset the mood with Fed's Duke saying Labour market improvement was "painfully slow" and Rosengren reiterating the "downside risks to the economy," and it seems to possibility of further quantitative easing (QE) is still not entirely unlikely.
The euro continued selling off after a mixture of heightened sovereign debt concerns and better-than-expected U.S data combined to weaken it. After the disappointing auction of French and to a lesser extent German bonds this week – market participants were already looking ahead to next week's Spanish and Italian sales which are expected to show a rise in risk premiums and further downside for the single currency. Investors are concerned about the whole of 2012 Q1 which will be a busier than normal period for government refinancing. On the data front the U.S saw a drop in unemployment and whilst this could be put down to seasonality it nevertheless added a further boost to the dollar as it lessened likelihood of QE3. Euro-zone data compared negatively to the U.S with unemployment stuck at 10.30% and Business Confidence down. Retail Sales was down -0.8% 4bps below the expected -0.4% decline.
The pound rose to a 16-month high against the euro as mounting sovereign debt concerns led many investors from the euro-zone to the relatively safe shores of the U.K. Against the dollar, however, the pound sold off after data showed a much better employment situation in the U.S which led many to speculate the Fed may hold off from further QE as one section of its remit shows improvement. Recent PMI data was surprisingly upbeat for sterling and helped support it through a volatile end to the week. Sterling in forex
appears to be decoupling significantly from the euro and this will probably continue unless some major upsets occur in the U.K to lead investors to think growth is stalling. Or there is a significant event to spur enthusiasm for the single currency as according to analysts the pound benefits mainly from the "least ugly" effect rather than due to interest in fundamentals of its own.
The yen rose on Friday as risk aversion increased over European sovereign debt concerns. The yen rose despite warnings from a government official yesterday that the authorities would be carefully monitoring foreign currency movements and would be ready to intervene if necessary. Previously investors had bought back into the yen following criticisms of solo-intervention by the U.S however the official dismissed these as unfair given the unprecedented rise of the yen and its negative effect on exports. Against the euro the yen set historic 11-year highs below 98 yen to the euro and the expectations are that the trend will continue as markets brace themselves for more uncertainty next week when Spain and Italy embark on major refinancing via auctions of bonds and bills. However, at some point there is now also the expectation of intervention and this may counteract the heavy safe-haven buying of recent days.
Analysis by Forex4you India