The major action for the week happened on Thursday night as Dollar finally broke against the Yen through the psychological 100 level and signalled to the rest of the market that the dollar bull trend is still intact.
As investors were giving up on further dollar strength during the past couple of weeks, the US dollar bullish move came almost a week after the latest US payroll numbers. On Thursday night, Euro, Yen and Sterling tumbled along with the rest of the G10 versus the dollar. The main driver remains whether the Fed might taper their Quantitative easing program sooner than expected as employment data has been coming stronger than expected along with a stronger moving average.
After a volatile week, the focus is likely to shift back to the US next week with the release of March retail sales, industrial production and CPI inflation. If the data exhibit a relatively weak tone, this may take some of the enthusiasm off from last week’s employment report and keep markets inclined to doubt the scope for a near-term tapering of Fed QE programme.
On the foreign exchange side, currencies closed the week with a stronger Dollar across the board. On Thursday, the Bank of England delivered an unchanged policy decision, in line with expectations. After both the Industrial Production numbers and the BoE, Sterling attempted a higher move, but the reaction was fairly muted. After reaching a high of 1.5599, the Pound ended the week close to the lowest level seen during the week of 1.5358.
After being investors’ favourite trade during the past couple of days, the Euro plummeted by the end of the week to a low of 1.2986 following a stronger USD across the board.
In the commodity complex, Gold prices remain shaky with prices dropping by the end of the week to a low of $1,420. Physical gold prices on the other hand remain supported in Asia around 4 percent higher than the Bullion trading prices. Oil prices remain strong on the back of a strong US equity markets in addition to the ongoing Middle East tensions.
Jobless claims, lowest level since November 2007
Jobless Claims in the US fell to the lowest level since in over five years, signaling labor market resilience in the face of fiscal austerity implemented since the beginning of the year. Initial claims for state unemployment benefits fell 4,000 to an adjusted 323,000, the lowest level since January 2008. Economists had expected a drop to 335,000. A better indication of the employment state in the US is the four-week moving average for new claims, which dropped 6,250 to 336,750—the lowest level since November 2007.
The US budget deficit likely to continue shrinking
The shrinking of the US federal deficit has been an important and over-looked factor in the US recovery. The congressional budget office is now reporting strong revenue collection, up by 16 percent since the start of the fiscal year in October 2012. Add to it the sequestration and other reductions in expenditures; this is seeing the deficit narrow. Additionally the government agency Fannie Mae has also said it will make a $59.4bn dividend payment to the government in June. Combined, both developments are expected to give president Obama until roughly October to address the debt ceiling.
Europe & UK
Positive Euro zone news albeit a German slowdown
The positive tone continues in Europe for a second week in a row. According to German newspapers, the ECB is looking at buying bad loans from southern Europe to relieve the pressure on banks in crisis-stricken countries. Part of the scheme would be to buy asset-backed securities, which allow banks to pass on credit risk to other investors in order to free up capital for lending. The plan would help to mitigate the effect of new regulations, which require banks to boost capital and liquidity buffers.
Looking to the German trade data for March, imports and exports rose slightly after falling in February, suggesting the country is picking up again after a contraction at the end of 2012. In the First quarter, exports remained under pressure from weak demand in the Euro zone.
Greek officials expressing hope that the economy is recovering
Greece Finance Minister Yannis Stournaras was quoted this week saying that he foresees Greece returning to capital markets in 2014 when rescue funds from its latest bailout programme run dry, if it achieves a primary budget surplus and positive rates of growth first.
For the first time since the eruption of the crisis in October 2010, when Greece was forced to go to the EU and IMF for financial assistance, 10-year-bonds closed below 10 percent earlier this month, reflecting improved budget figures and optimism that Greece is meeting the terms of its bailout agreements
Italy industrial output falls
Industrial production fell in Italy more than economists expected in March. Output decreased 0.8 percent from February when it fell 0.9 percent. The number was higher than expected as economists had expected a drop of 0.3 percent.
The UK is still in a negative environment
On Thursday, the Bank of England delivered an unchanged policy decision this week, in line with expectations. Unlike the Fed, the Bank of England is unlikely to shift to less easing anytime this year, so investors can’t price much in terms of relative monetary policy tightening. Also the Sterling has been negatively correlated with risk appetite. Looking at the balance of payments, inflows remain exceptionally weak due to negative real yields. The UK appears to be suffering from a decline in the relative profitability of its foreign investments.
Asia
Japanese investors finally buying foreign bonds
According to the weekly portfolio data released from the Ministry of Finance, Japanese investors net-bought ¥204.4 billion of foreign bonds in the week of April 22nd and net-bought ¥309.9 billion of foreign bonds in the week of April 29th. While Japanese investors have been net-sellers of foreign bonds in the previous six consecutive weeks since mid-March even after BoJ governor Kuroda introduced unprecedented monetary policy easing on April 4th, it seems that Japanese investors are slowly starting to react to the new monetary policies. In addition, Japanese investors net-sold ¥2.2 trillion of foreign bonds in April. However, ¥2.4 trillion was from banks, which flows do not have impact on the currency market.
The Peninsula
