Currency Briefing - what you need to know for Thurs April 19, 2012

Sitting at $1.2525, the local currency slipped against the US dollar following losses both in Europe and on Wall Street.

IG Markets Singapore said:

The Singapore dollar has slipped against the greenback this morning as it sits back at $1.2525.

It has been a pretty choppy week as investor sentiment and equities have moved up and down over the last few days. Firmer US corporate earnings gave way to worries about Spanish debt auctions taking place this week.

The local currency had sat at $1.2477 yesterday as risk sentiment improved. But a night of losses across Wall Street and Europe has seen traders heading back into safe havens.

The Singapore dollar is likely to face tests of faith, along with other Asian currencies, as its continues on a gradual appreciation against the greenback. More blips are expected this week with a crucial Spanish bond auction tonight.

GFT meanwhile noted (for 18 April 2012 trading):

Despite some intraday volatility, the euro continued to consolidate against the U.S. dollar. For nearly 2 weeks now, the EUR/USD has traded in a relatively tight 200 pip trading range and its two way price action indicates that investors are not sure how desperate Spain’s problems will become.

Earlier this month, Spain suffered its worst bond auction of the year but yesterday, they successfully sold 12 and 18 month T-bills. The real test of investor confidence will occur tomorrow when Spain auctions off its 2 and 10 year bonds. Fearing the drop of another bomb from Spain, traders have refrained from loading up on euros.

Early gains in the currency was credited to repatriation by Spanish banks shoring up capital ahead of the auction but this is more bad than good because it implies that the banks fear another failure. Investors are always more apt to buy short versus long term debt which can explain why demand for the bills were so strong. Ten year Spanish bond yields at current around 5.76 percent. Earlier this month, it was as high as 6.019 percent, sparking widespread fears that they would be forced to request for a bailout, which was what happened when Greek, Portuguese and Irish yields rose to 7 percent.

If tomorrow’s auction goes well, the EUR/USD could break to the upside. However if Spain fails to attract enough investors, the EUR/USD could make another run for 1.30. European yields ended the day off their lows which does not bode well for the euro. Although Spanish yields still fell on the day, the 10 year Italian bond yield increased slightly after Italy revised down its GDP forecast for 2012 from -0.5 to -1.2 percent and raised its deficit target to 0.5 from 0.1 percent of GDP.

It shouldn't surprise anyone that the Italian economy is in trouble but the latest revisions show the degree of damage that Mr. Monti's tough austerity measures will have on the Italian economy. These forecasts are still more optimistic than the IMF's, who predicts a 1.9 percent contraction this year. The Euro area economy as a whole is also expected to contract in 2012 and negative Italian growth will be a large contributor to the decline.

RBS, on the other hand, reported (for 18 April 2012 trading):

A less dovish than expected set of Bank of England Minutes, and the speech by BoE Deputy Governor Tucker today now make it look unlikely that we will get further QE in May. This provided rate support for GBP, although spot has still lagged the move in spreads, traditionally the dominant driver of EUR/GBP.

At the same time, rising Euro area periphery stress is likely to pressure this pair lower. We remain short EUR/GBP as a trade recommendation. The risk-averse theme overnight remained throughout the US day and few notable developments meaningfully drove currencies.

The Bank of Canada's Monetary Policy Report was the big data release of the otherwise quiet US session, but it did not surprise and had little effect on the CAD after the key conclusions of the MPR were included in the policy statement yesterday.