FX news and analysis 24th Feb

USD

 The dollar weakened on Friday, posting its largest daily slide versus the euro for the whole of February as risk appetite rebounded on the expectation of more cheap money flooding markets curtosy of the ECB's second long-term refinancing operation (LTRO), scheduled for the end of this month. The recent strong economic data was not enough to keep the dollar well bid as an improving outlook for Europe helped aid risk appetite and haven flows – a more important source of demand for the greenback - ground to a halt. On the data front the Michigan Confidence Survey rose by 75.3 compared to the 73 expected and 72.5 previous – with the result that risk appetite probably rose – New Home Sales the other main event also rose above expectations to 321k vs 315k expected (Jan) although overall this represented a disappointing fall compared to the previous month of -0.9% compared to the 2.6% increase envisaged by analysts.

EUR

The euro rose strongly after risk appetite increased in expectation of the ECB's 3-year refinancing operation, in which it will lend up to 480bn euros to banks at ultra cheap rates. This is expected to maintain strong demand for peripheral bonds especially Italian and Spanish debt, and keep yields at a sustainable level. The example of the ECB's first LTRO in December which led to an un-freezing of credit markets and lower borrowing costs for peripheral nations, helped boost risk appetite as more of the same is expected again. The euro also gained on greater confidence that the Greece would not default after the next step in the bailout process went ahead with the Greek parliament voting through measures which will ratify a bond swap, which could wipe 107bn euros off of the country's privately held debt. Next week there will be another important vote on deeper cuts and austerity conditions. If it is passed it will open the way to the release of funding and this may add even more zest to the euro's rise, if it hasn't been priced in already. On the data front, German GDP remained the same at 1.5%; the 4th quarter fall of -0.2%. was seen as more blip rather than a sign of long-term weakness. Other data – all for Germany Q4 - showed a rise in Capital Investment to 1.1% from 0.5%; Construction Investment rose 1.9%; Domestic Demand rose 0.1%; Exports fell -0.8% when -1.4% had been expected; Government spending rose 0.1%; Imports fell -0.3% vs -0.9% expected; Private Consumption fell -0.2% vs -0.1% expected.

GBP

 The pound rose on a rush of risk appetite on Friday after a vast improvement in the outlook for Europe helped increase investor demand for riskier assets. Sterling was helped by a change in the outlook for Europe following the the ECB's announcement that it would be releasing another 450bn in cheap finance to help shore up banks and artificially increase demand for peripheral debt. On the data front 4th quarter GDP stayed the same at -0.2% QoQ but fell a basis point YoY to 0.7% compared to 0.8% expected. Other data was more upbeat and continued the trend for stronger prints: Exports (4Q) rose to 2.3% vs 1.6% previous and Government Spending rose to 1.0% vs 0.1% expected and -0.3% previous; Gross Fixed Capital Formation (4Q) fell to -2.8% compared to -0.7% expected and -1.0% previous; Imports rose 0.4% vs 0.1% estimated; Index of Services 3mo3m showed no growth at all as expected. Private Consumption rose to 0.5% vs 0.2% predicted although Total Business Investment fell heavily – and could be a cause of concern – by -5.6% when -0.7% had been expected and a 1.0% level of growth had been marked in the quarter before.

JPY

The yen fell even deeper on Friday as a mixture of heightened risk appetite on ECB easing and negative outlook for the future of Japan's nuclear industry led to fears of permanently high fuel costs and dampened the forecast for the yen. 52 of country's 54 nuclear reactors have been closed for stress tests as a result of the Fukushima Diachi disaster and the country has had to import fossil fuels at higher costs during the period. The plants were expected to re-open this summer however growing concerns about the question of where to store the huge amount of nuclear waste now threaten to keep the stations closed as political opinion polarizes against nuclear power. Japan is too small and densely populated to store the waste easily and it still has not completed an expensive recycling plant which would also be costly to run. Importing of fossil fuels is costly and has impacted adversely on its current account surplus, threatening to destabilize the country's finances. Japan has the highest ratio of debt to GDP in the world and it sustains this through its current account surplus, however, if that were removed it would have to go to international money markets for the finance and be subject to the same borrowing costs as other countries, with potentially disastrous effects as the country lost its AAA rating last year.