The renaissance in the risk trade is continuing this morning. The EUR is better bid vs the USD and the JPY, stocks are moving higher and the yield on the 10 yr JGB has pushed higher in the wake of more good Japanese economic news and forthcoming supply.

Despite the initial shock of poor US retail sales figures last Friday, a deeper examination of the data revealed that sales ex autos, gasoline and building materials rose +0.1% after a fall of -0.2% in April. This is suggestive of a positive contribution from sales to GDP. While the ability of the markets to shrug off the initial negative impact of the US retail sales data was strengthened by the increase in Friday’s release of Michigan sentiment, sentiment is also being buoyed by data elsewhere. Following on from last week’s solid Japanese GDP data, sentiment amongst Japanese large business rose noticeable in Q1, the index rising to 10 from 4.3 in Q1. This news was followed by news of better than expected Eurozone industrial production data, which managed a +0.8% m/m rise in April despite an upwards revision to the March release. EUR/USD has seen highs of 1.2256 this morning. Although it has met some resistance at this point a close above the 1.2220 area tonight would increase the risk of further near-term gains for the EUR.

In spite of the EUR’s generally better tone, EUR/GBP is holding close to its lows of the session. Ahead of the June 22 budget the government’s Office for Budget Responsibility (OBR) has this morning announced revised UK growth and budget deficit data. The previous government’s growth data was widely considered as too optimistic meaning that a downward revision came as no surprise. The official forecast is now 1.3% for this year, this compares with a Bloomberg survey forecast of 1.2%. The negative implications for the budget deficit/GDP ratio from the downward revision to growth were softened by downward revisions to borrowing costs. In the 2010-15 forecast period, net borrowing is forecast to be GBP 22 bln less than projected by the previous government in March. The budget deficit to GDP ratio is forecast at 10.5% in 2010/11 falling to 3.9% in 2014/15. While gilt-bund spread have widened this morning on the back of improved risk appetite, sterling is holding in well. EUR/GBP is holding just above 0.8300 this morning; though the recent break below the key 0.8400 trendline suggests that risk is on the downside. While the more positive tone in sterling can be validated by the government’s commitment towards budget repair, this is a key week for UK economic news suggesting that volatility could be high. The UK is fairly unique in the industrialised world at present insofar as its headline inflation release is well above the central bank’s target. The market is expecting some easing in inflation pressures tomorrow in line with the BoE’s forecast that inflation is set to fall to more benign levels this year. However, strong data could increase fear of a BoE rate hike by year-end.

New Zealand retail sales data were a disappointment overnight (falling -0.3% m/m in April) while house prices dropped -0.4% m/m in April. Following last week’s RBNZ rate hike, these data will offset fears of further near-term rate increases. New Zealand does not have the huge mining wealth of Australia suggesting its economic performance is marked by very different factors. That said, the recent budget can be seen as moderately inflationary and signs that the global recovery remains in place should keep rate hike speculation alive. RBNZ Bollard commented this morning that the NZ recovery is a balancing act. NZD/USD has performed well this morning on the back of increased risk appetite.

This afternoon Canadian motor vehicle sales data are due.

Jane Foley Research Director +44 207 398 5024

FOREX and other leveraged products involve significant risk of loss and may not be suitable for everyone. is a trading name of GAIN Capital – UK Limited and is authorised and regulated by the Financial Services Authority (FSA FRN 190864)

The information and opinions in this report are for general information only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. This report has been issued by GAIN Capital – UK Limited (, authorised and regulated by the Financial Services Authority.