Following
the drama surrounding the US fiscal cliff talks, monetary and currency
policies will remain a very important focus. The Federal Reserve
will maintain a very loose monetary policy for now, butt he latest Fed
minutes have injected a greater mood of uncertainty and the possibility
of a tightening. The Bank of Japan will also be under intense pressure to boost policy further. The ECB will
also consider further action to underpin the economy which will ensure
very loose monetary conditions and may serve to lessen the threat of a
severe deterioration in risk appetite.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Friday January 4th | 13.30 | US employment report |
| Thursday January 10th | 12.00 | Bank of England interest rate decision |
| Thursday January 10th | 12.45 | ECB interest rate decision |
Dollar:
The US fiscal
deal has eased immediate fears surrounding a disorderly policy
tightening. Nevertheless, there will still be a significant policy
tightening which will have some impact in curbing consumer spending
growth. The deal was also only a stop-gap measure and there will be
further political confrontation surrounding spending cuts and the debt
ceiling. There will be uncertainties surrounding the growth outlook and
risk conditions. There is a very dovish Federal Reserve committee for
2013, but the latest minutes will spark some speculation that there will
be some tightening later in 2013. Net longer-term yields should be
dollar supportive for the US currency.
After initial weakness following the US budget deal, the dollar found support near 1.33 against the Euro and rallied strongly against European currencies
Following
the deal to avert the immediate US fiscal crisis, there was a renewed
consideration of the longer-term outlook. There were further concerns
that the spending issue would have to be tackled again before the end of
February and Congress will also have to tackle the debt-ceiling issue
with the potential for further tense negotiations. There was some
reassessment of risk considerations which also curbed dollar selling.
As far as the US data releases were concerned, there was an increase in the ISM manufacturing index to 50.7 from 49.5 which provided some degree of relief.
The ADP employment data
was stronger than expected with a gain of 215,000 private-sector jobs
for December from a revised 118,000 previously. Although there was a
higher than expected release for jobless claims, there was greater
optimism surrounding the US payroll report.
The latest FOMC minutes
stated that some members were concerned surrounding risks associated
with further quantitative easing, especially as it would make it more
difficult to secure an eventual exit strategy. In this context, several
members wanted to scale-back bond purchases well before the end of 2013.
There was still some degree of caution surrounding the labour market,
but there was shift in expectations on potential tightening this year as
markets had been primed for a very dovish tone.
| Euro |
Structural
fears surrounding the Euro-zone have eased for now which will lessen
the potential for aggressive selling pressure. There will still be a
high degree of unease surrounding the growth outlook and there will also
be pressure for the ECB to relax monetary policy further. The bank
will still be uneasy over the prospect of negative deposit rates and
there will also be opposition from the Bundesbank. Any friction within
the ECB will tend to undermine confidence in the Euro. There is also
less scope for capital repatriation which will tend to lessen scope for
Euro buying and a Spanish aid request would be likely to provide only
initial currency relief.
The Euro was unable to sustain
an initial advance following the New Year break and retreated sharply
towards the 1.30 level against the dollar.
Italy’s lower house approved the 2013 budget in parliament and, as expected Prime Minister Monti
submitted his resignation. There were some suggestions that he could
stand for election in forthcoming elections, but uncertainty remained
high.
The final Euro-zone PMI data was slightly weaker than
expected with a dip to 46.1 from 46.3 as there was a dip in the German
index with an improvement in the Italian index offset by a weaker
Italian outcome. The data maintained some degree of unease surrounding
the Euro-zone outlook which dampened Euro demand.
There was some
speculation that capital repatriation associated with the year-end Euro
demand to bolster balance sheets had eased. An easing of flows could be
significant in triggering a wider loss of Euro support.
There was further speculation that the ECB could
consider a cut in interest rates at the January meeting, but a higher
than expected German inflation reading increased speculation that there
would be Bundesbank opposition to any rate cut and there would also be
unease within the Council over any move to set a negative deposit rate.
Although
a surprise decline in Spanish unemployment, provided some relief, there
were concerns that the fall reflected longer-term unemployed leaving
the labour market rather than any real improvement in conditions. The
German labour-market data was close to expectations with a 3,000
unemployment increase for December.
The latest money-supply data recorded
an eighth successive decline in private lending which maintained unease
over the outlook, but there was a small increase in banking-sector
deposits in Italy and Spain which provided some relief. Spain’s
admission that it was using social security funds to buy government
bonds also unsettled confidence and sparked expectations of a bailout
soon.
Yen:
There will be intense pressure for the Bank of Japan
to engage in further aggressive policy easing with the next policy
meeting due in the third week of January. The government is also
planning a further round of aggressive fiscal stimulus in an attempt to
ease deflationary pressure. These factors combined will tend to have a
negative impact on the yen, especially with a lack of confidence in the
Japanese fundamentals. The Japanese currency will still gain some
degree of support when risk appetite deteriorates and there will also
be pressure for a limited correction after recent sharp losses.
The yen remained
extremely weak as it dipped to the lowest levels in more than two years
against the dollar. Incoming Prime Minster Abe continued aggressive
calls for deflation to be tackled and warned that he would look to
change the central bank Act which ensures independence if the Bank of
Japan fails to meet inflation targets.
Expectations that there
would be aggressive action to ease deflation risks through aggressive
monetary and fiscal policies continued to have a negative impact on the
yen. Weak underlying yen sentiment was offset by pressures for a
technical correction following sharp losses and the dollar consolidated
above the 87 level with Japanese markets still closed for a holiday.
The
dollar found strong support on dips and pushed back above 87 with
initial support from the stronger than expected US ADP report. There was
further buying support following the Fed minutes with a shift in
expectations. Japanese markets re-opened following the new-year break
which triggered a fresh round of yen selling, particularly with a
widening in yield spreads to the highest level since April. The dollar pushed to a fresh 29-month high above 87.75 against the Japanese currency.
| Sterling |
There
will be mixed expectations surrounding the UK outlook with a divergence
in analyst expectations and mixed data. Overall, there is slightly
reduced fear surrounding the threat of another slide into recession,
especially with some evidence that consumer lending is improving. In
relative terms, the UK currency will also gain some support on relative
grounds with expectations of loose monetary policies in the US and
Euro-zone. The UK currency will tend to lose ground when risk
appetite deteriorates and will struggle to make further significant
headway against the US currency.
Sterling initially spiked
higher against the US currency following the New Year break before
hitting strong selling pressure with a retreat to lows below 1.61 .
The UK data was significantly stronger than expected with an increase in the PMI manufacturing data
to 51.4 for December from a revised 49.2 the previous month which was
the highest figure for 16 months. The data also provided some degree of
optimism surrounding the UK economy which provided underlying Sterling
backing.
There was initial Sterling support from an
improvement in international risk appetite as the UK equity market
tested the highs from mid 2011, but there was a slightly more cautious
tone later in the week which pushed Sterling lower.
The latest PMI construction
report was weaker than expected with a decline to a six-month low of
48.7 from 49.3 the previous month. The data dampened optimism triggered
by the stronger than expected manufacturing release and the latest
services-sector data will be watched very closely on Friday and will
have an important impact on underlying sentiment.
Swiss franc:
The National Bank
will remain strongly committed to maintaining the 1.20 minimum Euro
level in the short-term, especially with a strong determination to
protect competitiveness and avert any serious deterioration in
industrial conditions. Aggressive policy relaxation elsewhere will
maintain the risk that upward pressure on the franc will intensify again
as investors look for a safe-haven, especially if the Japanese yen is
subjected to further selling.
The Euro held relatively
steady against the franc, but was unable to hold above 1.21. After
finding support around seven-month lows, the US currency pushed to a
fresh 3-week high above 0.9280 as the dollar secured wider support.
The latest PMI report
recorded an increase to 49.5 for December from 48.5 previously. In
contrast, the latest KOF index retreated to 1.28 for the month from 1.50
previously which will maintain unease surrounding business confidence
and pressure for franc gains to be resisted.
|
| Australian dollar |
The Australian dollar
continued to probe resistance above 1.05 against the dollar, but it was
unable to sustain the gains and retreated back to below this resistance
area late in the week. The currency drew initial support from gains in
risk appetite following the US fiscal deal before the mood turned more
cautious again as enthusiasm faded.
There was a slightly more optimistic tone surrounding the Chinese outlook
which provided some support for the Australian currency. The domestic
PMI indices were still generally lacklustre amid fears over a further
slowdown with a significant deterioration in the services-sector index.
Despite
potential reserve diversification, the Australian dollar will find it
difficult to sustain gains, especially as Chinese economic sentiment is
liable to deteriorate again.
Canadian dollar:
After
finding support on dips towards parity, the Canadian dollar was able to
recover ground and move back to the 0.9840 area on a general
improvement in risk appetite following the US fiscal deal.
The US currency
was resilient at lower levels and moved higher as markets turned
significantly more cautious while the Fed minutes provided net US
support.
Even with near-term resilience and optimism
surrounding the fundamentals, the Canadian dollar will find it difficult
to sustain any significant gains.
Indian rupee:
The Indian rupee
secured a positive tone around the new-year period and advanced to
three-week highs beyond 54.50 against the US dollar before the mood
turned more cautious with a move to the 55 area.
There were hopes surrounding a potential interest-rate cut by the central bank
which provided some underlying support for the currency. In contrast,
there were further uncertainties surrounding the outlook for the current
account and budget deficits which hampered underlying rupee demand.
Overall,
there is likely to be scope for only limited rupee gains given wider
risk conditions, especially as domestic growth concerns are liable to
increase again.
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| Hong Kong dollar |
The Hong Kong dollar maintained
a very tone and continued to test the 7.75 band limit, although
liquidity levels were inevitably much lower than normal during the New
Year period.
There was further speculation over the potential for
medium-term capital inflows and an increase in domestic inflation fears
which would also increase underlying stresses on the currency peg. Underlying inflation concerns will be fuelled by sharp gains in equity markets during the holiday period.
Inflation
fears are liable to continue and medium-term speculation surrounding
the Hong Kong peg with a potentially radical change in policies is
likely to continue.
Chinese yuan:
The yuan maintained a generally robust tone ahead of the new year break and consolidated close to the 6.23 area as the PBOC continued to resist gains in relatively subdued conditions with little change following the new-year break.
There
was a slightly more optimistic tone surrounding the Chinese economy as
the PMI indices held above the 50 level amid signs of strengthening
activity. There was still an underlying sense of caution, especially
with concerns over the credit and debt risks and shadow banking.
The yuan will
find it difficult to make much headway from current levels as the more
optimistic tone surrounding the Chinese economy is likely to fade.
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