Risky Business

Following the not so encouraging outcome of yesterday’s short tenure Italian bond auctions, where borrowing costs almost doubled, all eyes are likely to be on the longer dated bond auction in Italy due later today. This should gauge market appetite for bonds of troubled nations and will serve as a precursor for next week’s Spanish bond auctions. Across the Atlantic, market speculation of QE3 received a boost after a top Fed official opined that the further easing could be warranted, if the recovery proceeds at a slower-than-expected pace. At home, visible trade balance data just out indicates that deficit widened for February.

Pound Sterling – UK Markets

The Pound has climbed steadily against the US Dollar and is steady against the Euro this morning, as improving prospects for the British economy has turned the wave of optimism in favour of Sterling. Following upbeat PMI readings for March, the positive retail sales data from BRC, released yesterday, has helped in allaying fears of the British economy slipping into a recession. Meanwhile, data just out reveals that visible trade deficit in the UK widened for February. Additionally, a decline in Italian and Spanish 10 year bond yields yesterday propped up market sentiment towards high yield assets. Adding to the sentiment, an ECB board member indicated that the central bank would buy Spanish bonds to lower the nation’s borrowing cost. In an absence of major economic releases, Sterling is likely to track the wider market sentiment in today’s trading session.

US Dollar – US Markets

The US Dollar has continued its retreat against the Euro and Sterling, as market hopes of an additional round of easing received a boost after Fed Vice Chairman, Janet Yellen, opined that the central bank must continue to maintain its “highly accommodative policy stance” in order to spur the economic recovery. Additionally, “risk on” sentiment prevailing among traders following a drop in Spanish and Italian 10 year bond yields, also exerted pressure on the US Dollar. Yesterday, the keenly awaited Fed’s Beige book survey indicated that economic conditions in the US remained positive, with improvement in economic conditions of all 12 of the central bank’s regions. Additionally manufacturing, hiring and retail sales showed signs of strength despite higher fuel prices. St. Louis Fed President, James Bullard, shrugged off market concerns surrounding the job market by stating that the unemployment rate would fall to 7.8% by the end of this year. On the economic docket producer price index, trade balance and jobless claims are scheduled for release later today.

Euro – European Markets

The Euro advanced against the US Dollar yesterday as debt concerns surrounding the peripheral economies eased following assurances from Spain’s Prime Minister, Mariano Rajoy and an ECB executive member. The Spanish Prime Minister reiterated that Spain would not require a bailout and that Spain's deficit target remains “unconditional.” Further easing market anxiety ECB Executive Board member, Benoit Coeure, did not rule out the possibility of the ECB intervening in bond markets to ease Spain’s borrowing costs. In today’s trading session, the Euro has continued its upward momentum against the US Dollar and is hovering above the 1.31 mark, while it is trading almost flat against the Pound this morning. With only Eurozone industrial production on tap today, markets are expected to closely monitor the auction of longer-dated Italian government bonds, especially after short tenure Italian bond yields surged during yesterday’s auction. Italy is expected to sell government bonds dated 2015, 2020 and 2023 later today.

Other Currencies – Highlights

The Kiwi Dollar has gained against the US Dollar this morning, tracking gains in other high yield currencies that were supported by declining 10 year bond yields of major Eurozone economies. Additionally, data released earlier today revealed that house prices in New Zealand continued to climb for March. However, decline in the nation’s manufacturing index to a reading of 54.5 for March, from a score of 57.7 posted in the previous month, was taken in stride by market participants. We believe that risk sentiment in the market will be guided by the outcome of the Italian bond auction due later today and Chinese first quarter GDP data slated for release tomorrow. Meanwhile, the World Bank has cut its forecast for China's economic growth to 8.2% for 2012.