Spanish Inquisition

Spanish recession fears are weighing heavily on the euro, as risk sentiment took a hit yesterday following a rise in Spanish and Italian bond yields and a sharp deterioration in Eurozone investor confidence. However, high yield currencies have rebounded this morning ahead of Italian and German bond auctions scheduled for later today. The outcome of these auctions is likely to determine risk sentiment during the session. Across the Atlantic, the Federal Reserve’s Beige book survey will be keenly eyed for cues on regional trends in the economy. At home, the positive run for economic releases continues, with data released earlier today revealing an unexpected improvement in like-for-like retail sales for March.

Pound Sterling – UK Markets

Sterling retreated against the US Dollar in yesterday’s trading session as rising borrowing costs of major Eurozone nations spooked risk sentiment. The Spanish 10 year government bond yields moved closer to the 6% mark, as worries over the nation’s fiscal situation remained a cause of concern. An unexpected rise in UK like-for-like retail sales for March, as revealed by the British Retail Consortium survey, has led Sterling to head north against the US Dollar this morning, while it has held steady against the Euro. Alleviating concerns over a looming recession, the OECD affirmed that the British economy is on the brink of a lasting recovery, amid signs of a positive change in momentum. Meanwhile BoE policy maker, Adam Posen, opined that the recent liquidity injection undertaken by the ECB would not have a major impact on the employment situation in the Eurozone. In absence of major economic releases, today’s session should see the Pound respond to risk sentiment prevailing in the market.

US Dollar – US Markets

Traders yesterday grew inclined towards the US Dollar as a refuge against risk, amid intensifying Spanish economic woes. Spanish 10-year government bond yields soared to their highest level since December 2011, amid concerns over the health of the Spanish economy. However, the US Dollar has retreated against the majors today ahead of the Italian and German bond auctions. Meanwhile Fed policymakers, Narayana Kocherlakota and Richard Fisher, have rejected calls for a new round of easing, despite weak US non-farm payrolls for March. In terms of macro indicators, the Fed’s Beige Book regional economic survey, monthly budget statement for March and import price index are expected to be closely tracked today. Additionally, the outcome of Italian and German bond auctions is also likely to determine risk sentiment among traders.

Euro – European Markets

Looming threat of a Spanish recession led the Euro to trade under pressure against the majors in yesterday’s trading session. Spanish Economy Minister, Luis de Guindos, declined to rule out a rescue for the nation, while the central bank Governor, Miguel Angel Fernandez Ordonez, warned of capital injection for Spanish banks in the worst scenario. Additionally, the outlook for the Eurozone economy appeared grim as the region’s investor confidence for April weakened for the first time in four months. However, the Euro has pared its losses against the US Dollar and is trading almost flat against the Pound this morning. Meanwhile, data released earlier today indicated that Spanish industrial output continued to decline for February, while German wholesale price inflation slowed for the second consecutive month in March. With no other significant data in the region on tap for the day, the currency is set to track the outcome of Italian and German bond auctions. Evidently, news flows emanating from Spain are also likely to impact the Euro’s movement against the majors.

Other Currencies – Highlights

The Aussie Dollar has climbed against the US Dollar this morning, even as the Westpac/Melbourne Institute reported that consumer confidence in Australia for April deteriorated to the lowest level in eight months. Meanwhile, another data release highlighted weakness in the housing market, as home-loan approvals for February fell for the second month, although at a slower-than-expected pace. The Australian Chamber of Commerce and Industry has urged the Reserve Bank of Australia to lower the benchmark interest rate by 50 basis points next month, to curb declining competitiveness and arrest low business and consumer confidence. On the economic front tomorrow’s employment data, coupled with consumer inflation expectation, will be keenly tracked for further hints on the overall economic scenario.