FX news and analysis

USD

The dollar traded mixed on Monday after the increase in quantitative easing (QE) announced last week continued to weigh but was countered by a fall in risk appetite following an increase in Spanish benchmark bond yields after data showed the possibility that there might be early signs of a run on Spanish banks. The greenback traded more-or-less unchanged versus the euro, was down versus the pound but rallied against the weaker yen. In Spain there were major demonstrations and protests over the weekend against further cost-cutting which also unnerved markets given the possibility more austerity may be necessary in return for aid. The resulting concerns led to a fall in risk appetite, which helped support the dollar. On the data front, Empire State Manufacturing (Sep) fell by an unexpectedly large -10.41 when it had only been expected to fall by a muted -2.00 from -5.85 previously.

EUR

The euro's rally lost impetus on Monday after Spanish yields crept higher, with the 10-year climbing from 5.88 to 5.98 during the course of the day, following a report from the Bank of Spain which showed households and businesses withdrew 23bn in deposits from Banks in July. This week sees two important bond auctions for Spain – a 3-year on Tuesday followed by a 10-year on Thursday – and these highly charged events may also have unnerved markets. Large scale demonstrations in Spain over the weekend also added to anxieties although Spanish politicians are still saying that Spain will do whatever it takes to reduce its debts. Poor data also weighed on risk appetite on Monday, after the Euro-zone Current Account fell to 15.9bn from 17.4bn in July, although the Trade Balance in July showed a higher-than-expected rise in the surplus of 2bn. The Italian Trade Balance also showed a substantial rise to 4.5bn versus 2.1bn expected whilst Euro-zone labour costs (2Q) yoy rose by a basis point as expected, to reach 1.6%.

GBP

The pound traded higher against most counterparts on Monday as recent strong economic data and negative news for other currencies led to it outperforming other majors. The dollar continued to weaken as a result of QE3 and the euro weakened on renewed sovereign debt fears relating to Spain. On the data front Rightmove House Prices, rose 0.7% yoy in September vs 2.0% previous; mom it fell -0.6% vs -2.4% previous. Tuesday sees the release of U.K Inflation Data for August with analysts expecting a 1 basis point fall yoy. Turning towards the outlook for the rest of the week, we have Retail Sales out on Thursday and Public Sector Borrowing figures on Friday.

JPY

The yen continued to fall on Monday when it was one of the worst performers out of all the major currencies. The rise in risk appetite as a result of the measures taken by both the ECB and the Federal Reserve both continued to impact on the yen which predominantly rises on safety demand. The currency against which the yen performed the best was the euro which weakened after data from the Bank of Spain showing individuals and businesses making record withdrawals from banks reignited Spanish banking fears. There was no economic news out on Monday for the yen but the following days will be dominated by the BOJ rate meeting. It is unlikely rates, which are between 0.00% and 0.10%, will be changed, however, further easing is a possibility, particularly after Finmin Azumi's warning against excessive yen gains on Friday. Today's yen weakness across the board, though, seems to have dealt with the problem temporarily, and the actions of the ECB to cap borrowing costs may also prevent the BOJ from using more QE as well.