FOREX UPDATE

DATA / EVENT RISK : EUR: The German labour market data will be in focus given the recent weakness of the economy. The labour market has been the strong point of the German economy, employment up 3.6% over the past 3 years. The unemployment rate is seen holding steady at 6.8%. Euro could prove vulnerable to rise in unemployment and/or the rate. USD: Revisions to the final quarter GDP are expected to see growth cut from 1.1% (annualised) to 0.5% in the final quarter of last year. If growth turns out nearer to the initial estimate, dollar should hold up well. The Fed Chairman speaks again today, but this brings lower risk of surprises, especially with yesterday’s testimony taken well. Idea of the Day We’ve remarked before just how all the interesting action in currency markets is happening beyond the dollar. This is even more notable given that budget battles continue unabated on Capitol Hill. The automatic spending cuts (known as sequester) are due to impact on Friday, amounting to USD 1.2trn. The dollar has been very relaxed for several reasons. The cuts are spread over the next ten years, so the pain is also spread. Any deal done after Friday could be back-dated. Finally, the market is now used to seeing politicians leave things until the last minute (or often beyond) and then stitching together a deal. This is the current betting, but it’s a risk and creates scope for greater volatility in March and beyond. LATES FOREX NEWS: EUR: ECB President Draghi was emphasising the fact that inflation is going to fall and also that Italy needs to implement reforms if it is to ever benefit from the ECB’s OMT programme. Single currency was supported into the New York close and beyond. JPY: Kuroda was confirmed as head of the Bank of Japan, as widely anticipated. He’s seen as supportive of further simulative measures from the Bank of Japan to support the economy and fight deflation. In theory, yen negative, but the currency has moved a lot in anticipation and now wants to see further measures to justify more weakness. GBP: Consumer confidence data overnight remained weak at -26 (same as previous month). Sterling is currently the weakest performer on the majors so far this year. The potential remains for a corrective bounce on cable, but for now it’s struggling to come through. AUD: Private sector capital expenditure data was weak, falling 1.2% on the quarter whilst private sector credit growth was soft, rising 0.2% MoM. The Aussie wanted to be weaker on this, but soon found buyers. Supporting the currency was news from RBA that 34 central banks round the world currently hold the Aussie in their reserves. AUD just below 1.03 vs USD.