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Publication date: 20 April 2012
Author: Richard Driver, CaxtonFX

Yesterday’s Spanish bond auction produced decent results

Thursday’s Spanish bond auction produced some decent results and peripheral bond yields were spared another wave of panic. Still, there was no rally in risk appetite so it is clear the market remains tense about Spain and the eurozone in general, indeed nerves were fanned by rumours of a French debt downgrade yesterday.

Today’s session brings the monthly UK retail sales number, which represents the final indicator ahead of next Wednesday’s Q1 UK GDP figure.

STERLING/EURO: This pair traded sideways but looks comfortable above €1.22 ahead of UK retail sales data.

• UK retail sales data could well give sterling another lift this morning, if it reveals the bounce back that is expected. Last month’s figure was awful and a decent showing today should firm expectations of a positive GDP figure next week. Adam Posen did warn yesterday that the surprisingly weak performance of the UK construction sector in the past few months leaves the economy at significant risk of having entered another recession.

• German business climate data was impressive this morning but sterling is still trading above the €1.22 and risks appear to be to the upside.

STERLING/US DOLLAR: Sterling’s excellent performance this week has seen it appreciate against the US dollar by over 1.5% in just a week.

• The pound has traded very impressively this week, driven on by the release of some less dovish MPC minutes on Wednesday. US data has been somewhat softer this week as well, as shown by yesterday’s weaker US manufacturing data. Recent data from the US has shown Ben Bernanke’s cautiousness with regard to the US recovery is well-founded.

• Sterling is trading at an impressive $1.6075 this morning, which again represent excellent levels. Given our view that EUR/USD will break below $1.30 this quarter, it is hard to see GBP/USD maintaining current levels.

EURO/US DOLLAR: The euro is keeping its head above the $1.31 level, helped a strong German business climate figure.

• Yesterday’s Spanish bond auction avoided disaster and delayed any break lower for this pair. The weekend brings plenty of risk though, with the IMF and G20 minister both holding key meetings, while the first round of the French Presidential elections is also held on Sunday. Plenty for traders to chew over there.

• This pair trades well above $1.3150, thanks to a strong German economic figure but gains are likely to be tough to sustain. Rumours of a French debt downgrade ensured the euro traded heavily yesterday and the same is likely to be true today.

STERLING/AUSTRALIAN DOLLAR: Sterling continues to be well supported against the aussie dollar amid negative headlines from the eurozone and the US.

• Fears of a French debt downgrade and poor US economic data ensured that risk appetite was capped yesterday. Australian terms of trade data also added to expectations of an interest rate cut from the RBA next month.

• Asian equities were also on the back foot last night and sterling edged higher up to 1.5550. This represents a four month high and further gains appear to be in the pipeline.

STERLING/NEW ZEALAND DOLLAR: The NZD continued to struggle amid a weak inflation outlook and rising eurozone concerns.

• Expectations of a rate hike from the Reserve Bank of New Zealand are being pushed further out now, amid weaker kiwi inflation concerns over the global economic picture, particularly with regard to the eurozone. The kiwi dollar is certainly on the back foot in the current risk averse conditions.

• Sterling is trading at 1.9750 this morning, which represents almost a four month high. Further kiwi losses look likely ahead of a risky weekend.

STERLING/CANADIAN DOLLAR: Sterling is back up testing its 2012 highs again as weak US data hinders the loonie.

• Yesterday’s disappointing US manufacturing figure gave sterling another boost the Canadian dollar. The 1.60 mark has proven a tough nut to crack this year and we may see the rate pare back a little today, though another alarming headline could see fresh highs posted.

• Canadian inflation data is released this afternoon and the slowdown that is expected could also weigh on the CAD. This pair trades just below 1.60.

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