Rebound in Risk Sentiment Weighs on U.S. Dollar, Japanese Yen

Talking Points

• Japanese Yen: Weakens Against Most of the Majors
• Pound: Retail Spending Improves
• Euro: Ireland’s Borrowing Costs Fall Despite S&P Downgrade
• U.S. Dollar: Jobless Claims, Mortgage Delinquencies on Tap

Meanwhile, Ireland’s National Treasury Management Agency sold EUR 200M of debt due on February 14, 2001, with an average yield of 1.978%, which is 48bp lower than the rate offered at the August 12th auction, along with another EUR 400M bonds due on April 18, 2011, yielding 2.348%.

The bond auction suggests investors are turning increasingly optimistic towards the region as the government takes unprecedented steps to manage its public finances, but the ongoing weakness in the banking system may continue to drag on the economic outlook as policy makers expect to see an “uneven” recovery going forward. As a result, the European Central Bank is likely to maintain a dovish tone over the coming months and is widely expected to keep the benchmark interest rate at 1.00% over the coming months as President Jean-Claude Trichet sees subdued price growth over the near-term, but the Governing Council may see scope to raise its growth forecast as the recovery gathers pace. Nevertheless, the economic docket the M3 money supply grew 0.1% during the three-months through July, which was largely in-line with expectations, while the annualized rate increased 0.2% from the previous year amid forecasts for a 0.3% expansion.

The British Pound rallied for the second-day and pushed above the 200-Day SMA (1.5462) to reach a high of 1.5588, and the GBP/USD may continue to pare the decline from the previous week as it remains supported by the 50-Day SMA at 1.5380. Meanwhile, a report by the Confederation of British Industry showed its retail spending in the U.K. unexpectedly expanded at a faster pace in August, with its gauge for sales advancing to 35 from 33 in the previous month, and the data encourages an improved outlook for the region as private sector spending remains one of the leading drivers of growth. As the recovery gathers pace, the Bank of England may drop its dovish tone and see scope to start normalizing monetary policy towards the end of the year, and we are likely to see board member Andrew Sentance continue to push for a 25bp rate hike as the central bank expects inflation to hold above the 2% in 2011.

The greenback weakened across the board on Thursday, with the USD/JPY paring the overnight advance to reach a low of 84.47, and the rebound in market sentiment may continue to weigh on the dollar throughout the day as risk trends dictate price action in the currency market. Nevertheless, the economic docket is expected to show initial jobless claims slip to 490K in the week ending August 21 from 500K in the week prior, while continuing claims is forecasted to increase to 4495K in the week ending August 14 from 4478K in the previous month. At the same time, the gauge for 2Q mortgage delinquencies is scheduled to cross the wires at 14:00 GMT, along with the MBA’s index of mortgage foreclosures, and the event risks scheduled for later today could stoke increased volatility in the foreign exchange market as investors weigh the outlook for future growth.

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To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

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