Risk appetite backs off after China growth dips

USD

The dollar strengthened a little on Monday during the European session, after risk appetite fell overnight following the release of data from China which undershot expectations. This helped the safe-haven dollar recover after a mixed end to last week in which it lost ground to riskier currencies which gained as a result of increased investor appetite for yield. Recent U.S data undershot expectations, with Advance Retail Sales showing a lower-than-expected result of -0.4% in March when it had been expected to fall to only 0.0% from a downward revised 1.0% in the previous month, and the Michigan Confidence Survey falling to 72.3 when it had been expected to pull-back only a basis point to 78.5. Business Inventories, however, showed a lower-than-expected contraction of 0.1% from 0.9% previously in February. Producer Prices in March Contracted by -0.6% m/m versus -0.2% expected, but remained unchanged y/y. Overall the data continued the 'mixed' trend which was characteristic of recent months.


EUR

The euro rose at the end of last week as a result of support from risk appetite after investors continued to prefer riskier assets and peripheral bonds, including Italian and Spanish debt, to safer assets. The single currency shrugged off lacklustre data showing a deeper-than-expected fall in Industrial Production (Feb) y/y of -3.1% after m/m data was positive - showing a rise 0.4% from -0.6%. The euro was also supported by more news from the ECB which managed to recover a further 10.8bn of the LTRO's loans it gave to banks in 2011. The other major event was the meeting of the Eurogroup in Dublin over the weekend, where E.U Finmins were scheduled to discuss extending repayment deadlines for Portugal and Ireland, as well as helping Cyprus. The euro lost ground on Monday morning after global risk sentiment took a hit following the release of Chinese GDP, which showed a slow-down in growth in the 1st quarter. The euro recovered, however, perhaps due to data showing an increase in the Trade Surplus to 12.0bn in February from 8.7bn previously.


GBP

The pound weakened on Friday after investors seeking higher yields opted for more risky assets rather than U.K Gilts which could not provide a high enough return. It then continued falling on Monday after Chinese data showing a slow-down in growth which led to a general fall in risk appetite globally. Mixed data on Friday failed to give further impetus to sterling's recent rally after Construction Output (Feb) showed a -7.0% drop y/y from -5.5% previously, as the data questioned the strength of the recovery despite a m/m increase. On Monday further data from Rightmove showed a 0.4% rise in house prices y/y – from 1.2% previously and 2.1% m/m in April from 1.7% in March.


JPY

The yen strengthened towards the end of last week and continued into Monday after it reached key levels such as 100 yen to the dollar which many investors had forecast as possible targets for the recent down-trend, and at which buying interest was therefore clustered. The poor Chinese data on Monday, which showed a fall in GDP to 7.7% to 7.8% in the 1st quarter of 2012, when a rise to 8.0% had been expected, further impacted on the yen, driving it up overall as international investors sought safety and bought back into lower-yielding Japanese assets. The Chinese data may also have had an underlying weakening effect as well, however, as China is Japan's largest trading neighbour so any weakness in China rubs off on Japan. A further influence pushing up the yen was the negative reaction of the U.S to the recent rapid depreciation of the yen; and talk of currency wars could hinder moves by the authorities to further stimulate the economy using loose monetary policy.