The trend down for the Dollar which started last Thursday continued on Monday as investors moved into riskier currencies with more upside potential. US economic data was thin with nothing much moving the market to report. Optimism still prevails on an international level as European industrial manufacturing showed a much higher than expected gain. The Dollar was down against the Euro, ending the session at $1.2120 and was marginally down against the Yen at ¥91.57.

   The Euro rose after positive economic data showed an increase in industrial manufacturing of 9.5% YoY instead of the 8.7% expected. This is the biggest increase for over 20 years. The common currency shrugged off the news that Moody’s rating agency had downgraded Greek debt to junk status. This may be because the debt had already been downgraded by other agencies so it did not come as a surprise but it is testament to the strength of the countertrend push that this negative news hardly impacted. The Euro seemed impervious to other negative economic news as reports coming from Spain showed that major Spanish institutions were experiencing funding problems, finding it difficult to borrow in the international money markets. Spain is suffering at the moment as unions galvanize workers for another general strike against government plans to introduce labour reform and austerity programmes. The unemployment rate is double what it is in countries with bad unemployment, standing currently at 20%. The old-fashioned laws currently in place date back to the time of Franco when they were given as a sop to workers to prevent uprisings. These laws worked well during Spain’s economic boom when they provided the security and stability needed for modernization but are now seen as a liability. A recent report showed that Euro zone banks were three and a half times more exposed to Spain than Greece so anymore problems from Spain could send even larger shockwaves throughout the world. The Euro gained against the Dollar ending the session at $1.2120 and was up against the Yen at ¥111.90.

   Sterling climbed on Monday after comments from Bank of England officials over the weekend highlighted concerns that inflation could stay higher for longer. This contradicted Mervyn King's earlier remarks last month that high unemployment and ‘spare capacity’ would keep inflation low. There is a chance this just a blip and that inflation will begin to retrace as retail and consumer surveys have tended to dip lower over the last month but this remains to be seen. Also on Monday, the newly appointed Office for Budgetary Responsibility revealed its first findings that state borrowing would fall more quickly then expected and that UK economic growth would be less than expected in the next year. The markets reacted positively to the news. The only piece of economic data on Monday was the RICs house price survey which showed an increase in house prices. This continues the trend for strong housing data out of the UK. The Pound gained almost 1.3% against the Dollar closing at $1.4738 and closed up against the Euro at £0.8288.

   Japanese economic and industrial data was mainly flat on Monday with industrial production showing the same 1.3% rise as last month and the figure showing less of an increase YoY compared to last year; capacity utilization – a figure used to measure the amount of spare ‘capacity’ being taken up and used by companies was down to zero. This morning, however, the Yen strengthened on the back of news that the BOJ have unveiled a $33bn QE fund to battle deflation and help provide lending liquidity to large companies, to encourage longer term investment and growth. The Yen closed down slightly against the Dollar at ¥91.63 and down slightly against the Euro at ¥110.98.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst