EUR/USD
The German IFO index was slightly stronger than expected with a headline figure of 109.8 for March from 109.7 previously which was the fifth consecutive monthly increase. An initial Euro rally was not sustained as there were slightly more cautious comments from IFO economists which dampened the mood of optimism to some extent. The Euro then retreated to lows below 1.32 in choppy trading before reversing course.
There had been speculation over the weekend that the German government’s opposition to running the EFSF and ESM in tandem was softening and this stance was confirmed by Chancellor Merkel in comments on Monday. Although there was a continued rebuttal of any move to increase the size of the ESM, the remarks boosted confidence that the Euro-zone firewall would be strengthened which would in theory lessen the potential contagion threat if tensions increased again.
The positive Euro impact is liable to be offset to some extent by fears that difficulties in Spain and Portugal will re-ignite the Euro-zone crisis and pose an even more severe test of the firewall defences. There will be a particular focus on Spain with a general strike due on Thursday ahead of planned budget cuts on Friday.
The Euro rallied back to the 1.3250 area and gains then accelerated following the latest remarks from Bernanke. The US Federal Reserve Chairman was slightly more optimistic surrounding the growth outlook, but he also stated that the labour-market situation was far from normal. He also stated that it would not be the right time to withdraw monetary stimulus. The dovish comments put the US currency under wider selling pressure as yield support declined on renewed speculation over further quantitative easing. There was reduced defensive support as risk appetite also rallied with a slightly weaker pending home sales release not having a major impact. In this context, the Euro was able to push to a 1-month high above 1.3350.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar found support on dips towards 82.60 against the yen on Monday and proved broadly resilient even when subjected to selling pressure against European currencies. In this context, the yen was vulnerable on the crosses as the Euro regained the 110 level.
Although the dollar was undermined by dovish comments from Fed Chairman Bernanke, the impact was lessened by general yen weakness as international risk appetite improved.
There was evidence of exporter dollar selling during the Asian session which tended to toughen resistance levels and there were further doubts surrounding the fiscal outlook. The Bank of Japan made a commitment to combat deflation, maintaining expectations that further action will be taken to block any renewed yen appreciation.
Sterling
Sterling initially remained under pressure in European trading on Monday with a test of support in the 1.58 area, but the currency steadied as short-term players were unable to trigger any major stop-loss selling.
A technical recovery was enhanced by general US dollar weakness and Sterling pushed to highs around 1.5970 later in the US session. There has been reduced speculation over additional quantitative easing by the Bank of England which has helped provide some underlying support to the UK currency. Comments from Bank of England MPC members were relatively dovish with Miles warning over a weak growth outlook.
Sterling also gained some net support from an improvement in international risk appetite as equity markets recovered ground. Safe-haven capital flows related to the Euro-zone could also still provide significant backing for the currency.
Swiss franc
The dollar was unable to hold above the 0.91 level against the franc on Monday and then dipped sharply to lows around 0.9025 during New York trading.
The Swiss Finance Minister stated that the Euro minimum level should be set significantly higher at the 1.35-1.40 area. Although this had some immediate impact in weakening the franc and the Euro did find support below 1.2050, it was unable to make significant progress.
There is liable to be a continued reluctance to push funds out of Switzerland given uncertainties surrounding the Euro-zone and this will continue to provide underlying franc support.
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Australian dollar
The Australian dollar found support on dips towards 1.0450 against the US currency on Monday and rallied firmly during the day with a peak of 1.0540 as it capitalised on underlying US vulnerability. In the global context, however, the performance was still generally unconvincing.
Reserve Bank member Debelle stated that the currency was close to appropriate levels given the terms of trade, but he also speculated over the implications of a recent deterioration in export prices. The Australian currency was also hampered by persistent unease surrounding the Chinese outlook following a weak set of industrial profit data and was unable to make further headway.
