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Forex Flash: Global growth concerns driving currency market - BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the traditional safe haven currencies of the US dollar and the yen have continued to strengthen overnight, reflecting heighted investor concerns in the near term over global growth which follows recent strong gains for high yielding currencies driven by the BoJ´s aggressive monetary easing operation.

He sees evidence of a slowdown in US growth heading into Q2 continuing to build with retail sales contracting by -0.4% in March. Further, downward revisions to prior months also revealed that retail sales contracted modestly by -0.1% in January and real GDP growth is still set to expand by around 3.0% in Q1 although appears set to fall back below trend in Q2 as fiscal tightening weighs more heavily upon activity. Additionally, global growth concerns intensified further overnight by the release of the weaker than expected Chinese real GDP report for Q1. He writes, “The report revealed that economic growth unexpectedly slowed to an annual rate of 7.7% in Q1 following an expansion of 7.9% in Q4 2012. Industrial production growth slowed sharply to an annual rate of 8.9% in March from close to a 10% expansion rate through January and February.”

He feels that the disappointing report suggests our view that the rebound in economic growth in China during 2013 will prove only modest, running close to 8.0%. Also, commodity prices have been hit hard by the heightened global growth concerns with the price of copper declining to its lowest level since June 2012 during the peak of the euro-zone sovereign debt crisis. So far he sees that the negative impact upon commodity currencies has been relatively limited with the trade-weighted Australian dollar still trading close to record highs although downside risks in the near-term have clearly heightened.

Hardman continues to add that yen has also firmed following the release of the US Treasury´s semi-annual currency report to Congress on Friday which stated that Japan “must remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes”. It echoes the sentiment expressed in the recent G7 communiqué signalling that the US will tolerate yen weakness as long as it results from looser BoJ monetary policy in the form of purchases of domestic instruments providing a green light for the new BoJ easing programme. He finishes by writing, “We expect G20 finance ministers to also express this view at this week’s meeting. It has also been reported overnight that the BoJ will likely discuss modifying its JGB purchase operations following the volatile price action over the past week. The BoJ is expected to consider reducing the scale of each outright JGB purchasing operation while increasing the number of outright operations to seven or eight from planned six monthly.”

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