The Return of the Euro Crisis

The high yield currencies suffered on Friday as concerns over the global economy came to the fore following weak Chinese GDP data and rising yields of major peripheral Eurozone economies. However, there was some respite on the domestic front after S&P on Friday reaffirmed its top notch “AAA” rating for the UK. With housing data by Rightmove surprising on the upside this morning, all eyes are likely to be focused on the heavy domestic calendar this week. With little in terms of European data today, retail sales and business inventories data in the US are expected to hold market interest.

Pound Sterling – UK Markets

The Pound consolidated Friday’s losses against the US Dollar this morning on concerns over global economic growth. However, mounting concerns over Spain continue to support gains in Sterling against the Euro. Meanwhile, fears of an imminent downgrade for the UK economy petered out after S&P reaffirmed its top notch “AAA” rating with a stable outlook. The agency also projected that the UK's economic recovery is likely to gain traction over the medium term. Boosting sentiment further, data released early today revealed signs of strengthening in the British housing market after the average asking price of UK home, as reported by Rightmove, rose to a record high for April. Although today’s session appears to be quiet in terms of economic releases, the week ahead is expected to be eventful with crucial data lined up including consumer price inflation, jobless claims and the much awaited BoE minutes of the last monetary policy meeting.

US Dollar – US Markets

The US Dollar has continued to strengthen against the majors this morning, as global economic woes turned market participants increasingly risk averse. On Friday, lower-than-expected Chinese first quarter economic growth, rising Spanish and Italian bond yields and an unexpected decline in US consumer confidence raised serious questions over prospects for the global economic recovery. However, US Treasury Secretary, Timothy Geithner, remained hopeful of a decline in US unemployment rate before November’s election on the back of moderate economic recovery. Today’s key release includes retail sales for March which is expected to indicate a slower pace of growth. Other releases for the day include business inventories, NAHB housing market index, New York Empire manufacturing index and net long-term TIC flows. The US Dollar is likely to track macro indicators scheduled during the day for further direction.

Euro – European Markets

On Friday, the Euro declined against the majors with developments in Spain being the epicenter of investor concerns. Markets were spooked after Spanish government bond yields and cost of insuring debt soared to an all-time high on Friday. Additionally, investors turned “risk off” after data revealed that Spanish banks borrowed a record €316.3 billion from the ECB in March, almost double the previous month's figures. In today’s trading session, persistent Eurozone contagion fears have led Euro to trade on a weaker footing against the majors. Meanwhile, market speculation over the ECB resuming bond purchases gained momentum after a Spanish minister urged the central bank to buy more bonds to avert the Spanish crisis. However, Klaas Knot, a member of the ECB governing council, refuted this and indicated that he does not see a “good reason” to resume government bond purchases. With only Eurozone trade balance on tap for the day, the Euro is set to closely track Spanish bond auction due tomorrow for further direction.

Other Currencies – Highlights

The Yen has registered sharp gains against the high yield currencies, as the dismal scenario in the Eurozone fuelled risk aversion among market participants. Bank of Japan (BoJ) Governor, Masaaki Shirakawa, indicated that he would continue to monitor the risk that the nation’s banking system could face from Europe's debt woes. Aiding the gains in the Yen, Japanese department store sales data for March, released this morning, indicated a significant rebound. However, market speculation of further monetary easing in Japan received a boost after minutes of the BoJ’s latest monetary policy meeting released on Friday revealed that one of its policy board members proposed boosting the size of the asset purchase program. Tomorrow, the Spanish debt auction sets the stage for risk sentiment, while industrial production and consumer confidence data features on the domestic calendar.