FX news and analysis - 24th August

USD

The dollar traded higher on Friday although early gains were given back after the euro turned around following the news that the ECB was considering setting yield-band targets as part of the bond-purchase programme. Support may have come partly from data, including Durable Goods Orders which showed a jump in the headline figure of 4.2% in July from -1.6% previously and well above the 2.5% expected. However, the headline figure masked the disproportionate influence (53.9%) of commercial Aircraft orders - perhaps due to the Farnborough airshow - and Durables Ex Transportation was much less impressive, showing a fall of -0.4% when a gain of 0.5% had been expected, although still an improvement on the -2.2% previous. Capital Goods Orders non-defence, often used as a proxy for future business investment, plunged by -3.4% when it had been expected to recover to -0.2% from a -2.7% decline previously. The drop in Orders was offset to a certain degree by the robust Shipments figures which saw no-change and therefore was not expected to weigh on Q3 GDP.
EUR

The euro weakened slightly on Friday although it made an astonishing recovery towards the end of the day as speculation about the shape and form of the ECB's bond-purchase programme emerged with the addition of 'yield-band' targets as part of the programme. Rating Agency Fitch also mentioned the proposed scheme in a market note, commenting that it believed the scheme could work quite well in “allowing the sovereign affordable access to market funding,” however it warned that if ECB funding supplanted rather than facilitated market funding then the reliance on its money would not be consistent with an investment grade soverign rating (ie 'A' category or above). Thus putting a pressure on ratings. It now appears the ECB will wait until Germany's Constitutional Court has decided whether the country can legally support the various bailout funds before going ahead. On the subject of Greece, Merkel and Hollande were united in urging it to stick to its reform path, although Samaras met Merkel today and Hollande tomorrow.

GBP

The pound saw the release of Q2 GDP revisions on Friday which showed that the economy had not contracted as much as the first set of figures had suggested, with the year-on-year print easing to a -0.5% decline – which was better than the expected -0.6% - and also an improvement on the -0.8% initial print. The QoQ figure fell by a revised -0.5% compared to -0.7% previously. The pound weakened slightly, however, as other data also released cancelled out any positive sentiment generated by the GDP update. Total Business Investment Q2 (yoy) fell to 1.7% - from 14.8% - which was a much deeper contraction than the 3.6% expected. Exports fell by -1.7%, versus -0.9% expected and -1.7% previous. Gross Fixed Capital Formation dropped -3.2% vs -0.6% expected and 1.9% previous. Total Business Investment fell (QoQ) Q2 fell by -1.5% vs 0.3% expected and 1.9% previous. BOE's Weale also talked down speculation of more QE saying he would prefer an Interets Rate cut to more stimulus.

JPY

The yen traded broadly unchanged versus riskier currencies and fell against the dollar on Friday as risk appetite stabilized, following a firming up of details of the ECB bond-buying initiative, and its embedding firmly into the future outlook for the region. Relatively strong data from the U.S meanwhile may have altered the outlook for stimulus and leant the dollar support after it got hammered by the yen yesterday. BOJ governor Shirakawa gave a speech to Business Leaders in Osaka where he called for a “two-pronged” attack to help encourage growth, He argued that firms were not investing and that what was a required was greater “deregulation at a macro level” and more “differentiation” by companies at an “individual level”. Despite not directly alluding to further easing he made it clear he still believed an accommodative environment an essential element in the mix to promote growth.