FX news and analysis 10th Jan

USD

The dollar fell broadly on Tuesday after risk appetite strengthened following an easing in euro-zone debt concerns and a strong outlook for world Aluminium producer Alcoa helped drive up equities. Downgrade fears eased after rating's agency Fitch said it had no plans to downgrade France. The change in outlook was partly supported by strong French data which showed an increase in Manufacturing. There was also some purchasing of risk currencies such as the euro by corporates eyeing a bargain. On the data front NFIB Small Business Optimism came out as expected at 93.8 whilstIBD/TIPP Economic Optimism rose to 47.5 versus 45 expected. Wholesale Inventories for November fell to a 0.1% increase versus the 0.5% expected and 1.2% previous. Tomorrow all eyes will be on the Fed's Beige Book for a steer on the overall economic outlook and the chances of the Fed opening to the door to more easing.

EUR

 The euro continued to rally off of Monday's lows as risk appetite improved following a slight improvement in the outlook for the euro-zone after rating's agency Fitch said they did not intend to cut France's rating even though they reduced the outlook to negative in mid-December. The euro also rebounded as a result of corporate demand after it hit 16-month lows on Monday and thus viewed was viewed as a 'good deal'. Record number's of speculative short orders also gave a contrarian signal that the market was oversold leading to an inevitable bounce. The outlook remains pressured however as speculation mounts over how key Italian and Spanish bond sales go at the end of the week and these will be key in defining the longer term trend. On the data front French data was strong with Manufacturing Production rising by 2.2% versus -0.1% expected, Industrial Production rising by 1.3% versus -0.2% expected and Bank of France Business Sentiment to 96 versus 95 previous.

GBP

Sterling performed quite well versus its counterparts on Tuesday after a risk-on rally led by easing euro-zone debt concerns led to a corresponding bounce in the pound. The pound also benefited from safe-haven flows as a result of its reliable AAA rating and strong fiscal policy, although growth fears persist. The next major event for sterling is on Thursday when the BOE will make their rate announcement for January. It is widely accepted they will keep rates and asset purchases the same but there is a risk they may increase asset purchases to help stimulate growth given recent flatlining data and this would be bearish for the pound. Data out today, however, was better, indicating perhaps the BOE will hold off, with the RICS House Price Balance rising above expectations to -16% versus -19% consensus and -17% previous. Figures from the British Retail Consortium meanwhile showed Sales YoY in December rose higher than expected to 2.2% versus 0.5% estimated and -1.6% previous.

JPY

The yen fell against riskier currencies but rose slightly versus the dollar. Risky assets were helped by news that Fitch is probably not going to downgrade France as had once been feared. This in turn improved the outlook for the two important sovereign debt auctions at the end of this week involving Italy and Spain. The rebound was helped by demand from corporates looking for a deal and record short positions from speculators gave a contrarian signal. The yen is likely to continue to appreciate, however, as there is still no comprehensive solution to the main problems of over indebtedness in Europe. Buoyant Chinese Exports also helped the risk-on rally as they came out at 13.4% as expected although overall growth in China slowed to 2009 levels. Recent commentary from officials that they were closely monitoring currency moves with the intention of intervening if they grew too volatile could also be weighing on investor sentiment and taking the shine off the yen.