Consolidation was the dominant influence on Friday with narrow ranges encouraged during the Asian session by a market holiday in Tokyo. There was a rally in Chinese equities on some speculation over a looser monetary policy which helped underpin risk appetite and kept yen demand in check. AUD/USD maintained a firer tone with moves towards the 0.91 level. USD/JPY was still unable to make significant headway as it held below the 102.50 level.
Position adjustment was also a significant feature which tended to narrow ranges. EUR/USD found initial support on dips towards the 1.3750 area and rallied to a high just above 1.3800 at the New York open.
The latest ECB data recorded a larger than expected LTRO repayment of close to EUR20bn in the latest reporting week. European banks have now repaid over half of the loans taken from the central bank and this is continuing to have an important impact in draining excess liquidity. The immediate impact tends to be for a stronger Euro as money-market rates rise, but there will also be increased pressure for additional ECB policy action over the next few weeks.
This week’s Federal Reserve statement and press conference continued to be an important underlying focus. Since the initial spike, there has been a small corrective decline in US Treasury bond yields as the extent of hawkish Fed rhetoric is debated further. Markets were on high alert for a flurry of comments from Fed speakers due later on Friday.
Sterling remained generally on the defensive on Friday with GBP/USD subjected to a further test of support in the 1.6480 area. There was a recovery in Europe, but the pair was unable to make much impression on resistance and retreated to re-test support in New York. The latest borrowing data suggested that the government budget deficit for 2013/14 would be close to estimates at around £109bn. In historic terms, the deficit remains at exceptionally high levels and markets are starting to fret over financing given a less benign global risk environment.
The Canadian retail sales and inflation data was stronger than expected, easing any immediate pressure for lower interest rates and USD/CAD dipped sharply to lows below 1.1180 from a pre-data level near 1.1250 before fresh US buying support emerged.