FX News And Analysis: September 14, 2012

The dollar continued to fall to riskier assets after Thursday's FOMC meeting launched QE3, - an open-ended programme comprising 40bn of asset purchases a month, until employment improves. On the data front Advance Retail Sales showed a surprising rally to 0.9% vs 0.7% expected; CPI rose by 1.7% from 1.4% in the previous year and 0.6% mom; CPI Ex Food and Fuel fell 2 bps compared to a year ago, which was more then expected.

The difference in the Ex Food and Fuel figures reflected the lopsided impact of commodity price rises on inflation. Michigan Confidence (Sep) rose to 79.3 beating expectations which had forecast a fall to 74 from 74.3. Industrial Production (Aug) fell by -1.2% when a fall to 0.0% from 0.5% previous had been expected; Manufacturing Production (SIC) (Aug) fell by -0.7 when a -0.3% fall had been expected from 0.4% previously. Business Inventories rose, meanwhile, by 0.8% vs 0.4% expected.

EUR
The euro rose strongly as riskier assets mounted higher as a result of the Fed announcing more QE at its rate meeting on Thursday. The signalling of an open-ended programme, which means it will keep buying assets for as long as it takes to bring unemployment down, further supported risk appetite.

The euro was already in a strong position following monetary policy changes made by the ECB to support peripheral borrowing and deepen financial union. Today officials further supported the euro after talking down the chances Spain asking for another bailout.

On the data front Eurozone CPI Core (Aug) yoy fell to 1.5% from 1.7% previously when it was expected to stay the same; CPI non-core meanwhile came out at 2.6% in line with projections; mom CPI rose by 0.4% compared to -0.5% previously. Eurozone Employment (2Q) QoQ remained unchanged compared to a -0.3% fall previously; yoy it fell by -0.6% compared to -0.5% previously. Italian Current Account data showed a rise in the surplus to 1594m from 1029m previously.

GBP
The pound traded mixed on Friday, rising to 4- month highs versus the dollar which weakened across the board after the Fed's decision on Thursday to unleash a programme of open-ended QE. Sterling dropped sharply, however, against a more buoyant euro which continued to be supported by the ECB's promise to use bond-purchases to manage borrowing costs and recent talk of Spain not needing further aid.

The pound may also have been lifted by recent data which suggested the U.K might be struggling out of its recession. Recent Employment figures showed a sharper-than-expected fall in New Claims and the Trade Deficit also narrowed by a greater margin than analysts estimated. The pound was helped by the fact that the QE programme announced by the Fed was 'open-ended' and therefore potentially limitless. A recent Reuters poll pointed to increased growth in the U.K economy between July and September – the 3rd Quarter, of 0.6% after July's Industrial Production showed the largest rebound in 25 years.

JPY
The yen was one of the weakest currencies on Friday as it fell to riskier counterparts because of the rise in optimism following the pledging of unlimited support by the Fed at their policy meeting. A steadily improving outlook for the euro-zone which is preparing for a deeper banking-union and now has the (in the words of Mario Draghi) “effective backstop” afforded by OMT also weighed on the yen which rises on crisis safety-demand.

Fear of intervention from the BOJ stoked by commentary from Finmin Azumi at which he said the “one-sided” rally in the yen, could not be “overlooked” propped up the dollar as expectations of intervention increased ahead of the BOJ meeting next Tuesday. On the data front figures out on Friday morning showed a fall in Industrial Production (Jul) yoy, which fell -0.8% versus -1.0% previously; mom it fell by -1.0% vs -1.2% previously. Capacity Utilization (Jul) mom rose by 0.5% vs -2.3% previously.