The ECB is
significantly more optimistic surrounding the financial outlook, at
least in public which will help underpin Euro sentiment, with rate cuts
taken off the agenda for now. There is also a more confident tone
surrounding the Chinese economy, although this optimism could fade very
quickly given underlying credit conditions. In this environment, risk
appetite could deteriorate quickly again.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Tuesday January 15th | 13.30 | US retail sales |
| Friday January 18th | 02.00 | China Q4 GDP |
| Friday January 18th | 09.30 | UK retail sales |
Dollar:
The most likely outcome continues to be solid US growth
in the short-term even though there has been a persistent trend for
mixed economic releases. Federal Reserve policy will continue to be an
important short-term focus with some increased expectations over an
ending of quantitative easing this year. Member comments will be watched
very closely ahead of the end-January meeting. The overall tone is
still likely to be broadly dovish which will lessen potential dollar
support. Risk conditions will be watched closely with tensions liable
to resume over the US debt-ceiling talks and defensive dollar support
may increase again.
The US currency was unable to break
significant technical levels against the Euro and dipped sharply later
in the week following the ECB policy meeting with a retreat back towards
1.33.
The latest US employment report was relatively
close to expectations with a non-farm payroll increase of 155,000 for
December from an upwardly-revised 161,000 gain the previous month. The
unemployment rate was static at 7.8% and there was a modest increase in
earnings. The data will reinforce expectations of a solid US expansion,
but markets were expecting a strong release which lessened the potential
for further dollar buying support.
There was a stronger than expected reading for the ISM non-manufacturing
index with an increase to 56.1 for December from 54.7 the previous
month with a particularly strong reading for the employment report which
maintained optimism surrounding the outlook and potential for US
out-performance.
The decision to water-down Basel bank capital
reserve requirements from 2015 should have some positive impact on risk
conditions which would also curb underlying dollar demand.
The
Administration formally nominated Jack Lew as the new Treasury
Secretary. Any comments on the debt ceiling and fiscal situation will be
watched very closely and any remarks on the dollar will also be watched
very closely.
US jobless claims were slightly higher
than expected at 371,000 in the latest week from a revised 367,000
previously while there was a downward revision to the Philadelphia Fed
index for December, but the overall impact was limited
| Euro |
Structural
fears surrounding the Euro-zone will remain lower in the short-term.
There has been a further easing of peripheral bond yields with improved
investor demand for securities. The ECB is more confidence over the
financing risks and appears much less willing to consider a further cut
in interest rates. Confidence could, however, unravel quickly,
especially with continuing GDP declines in the peripheral
economies such as Spain with high levels of unemployment also increasing
social tensions. Euro support is therefore liable to fade again quickly
on fresh economic fears.
The Euro found firm support close to 1.30 against the US currency and advanced strongly later in the week after the ECB policy meeting.
There
was a small improvement in Euro-area business confidence, but the
unemployment rate increased to a record 11.8%. Data from peripheral
economies inevitably remained the key focus with Spanish and Greek
unemployment above 25% as youth unemployment remained above 50%. There
were further concerns surrounding the substantial political tensions
associated with extremely high unemployment levels.
The German industrial data
was again weaker than expected with a 2.9% annual decline despite a
small monthly recovery which continued to cause some unease surrounding
the Euro-zone growth outlook. There was also uncertainty surrounding
German parliamentary support for a Cyprus bailout which had some small
negative Euro impact.
There was a stronger than expected Spanish
debt auction as the five-year bond yield declined to below 4.00% from
4.20% previously and Spain was also able to sell more than the targeted
amount which increased confidence in the peripheral bond market and
pushed benchmark yields down further.
As expected, the ECB left
interest rates on hold at 0.75%, although there had been some calls for
the bank to cut rates. In the press conference, Draghi remained
generally downbeat surrounding immediate growth prospects with a warning
that risks were still to the downside and that further balance sheet
adjustments were needed. Inflation risks were described as broadly
balanced.
The rest of the briefing was significantly more
optimistic as Draghi stated that financial conditions had improved to a
marked extent. The ECB President stated that the decision to leave
interest rates on hold had been unanimous and gave the impression that
there had been no calls for rates to be cut, in contrast to the December
meeting. Although he refused to rule out the possibility of further
rate cuts, markets moved to price-out any reductions during 2013 and
this had a strong impact in boosting Euro demand.
The Euro was
also boosted by Draghi’s refusal to comment on exchange rates as he
pointedly stated that the ECB did not have an unemployment target.
Yen:
There will be intense pressure for the Bank of Japan
to engage in further aggressive policy easing with widespread
expectations that the central bank will introduce a revised 2% inflation
target at next week’s meeting. There will also be scope for a further
monetary easing while the government will announce a further fiscal
expansion. Defensive demand for the yen will also fade if there is a
sustained improvement in risk appetite and confidence in the global
growth outlook. A substantial amount of yen negative fundamentals have,
however, been priced in which could trigger a sharp correction.
The yen remained
under heavy selling pressure during the week with correction attempts
quickly attracting selling pressure on the Japanese currency. The US currency pushed to a 29-month high above 89 and the Euro also advanced very strongly during the week.
There
were widespread expectations that the Bank of Japan would introduce a
2% inflation target at next week’s policy meeting which would trigger a
further easing of monetary policy by the central bank.
The yen was also undermined by improved sentiment towards global financial conditions. The Japanese currency
was subjected to further heavy selling pressure later in the New York
session. Prime Minister Abe stated that the government would launch a
JPY10.3trn spending package to boost the economy and there was also
pressure on the Bank of Japan to target employment as well as inflation.
The economic data
provided no support for the yen with a JPY222bn current account deficit
for November, reinforcing fears over the balance of payments position.
|
| Sterling |
There
will be further uncertainty surrounding the UK outlook with particular
unease surrounding the consumer spending outlook as incomes remain under
pressure and there will be expectations of weak 2013 growth. The
balance of payments situation will also come under greater focus with
unease over potential funding pressures if there is a sustained decline
in defensive Sterling demand. In contrast, there will be Sterling
support from the aggressive monetary policies in the US and Japan.
Trends in risk appetite will still be important at times and the UK
currency will tend to gain some support when confidence in is stronger,
but the currency overall will find it difficult to make much headway.
Sterling was able to find support close to 1.60 against the dollar with
rallies back to the 1.6150 area while the UK currency was on the
defensive against the Euro with a move beyond the 0.82 level.
The UK goods
deficit declined slightly to GBP9.2bn from GBP9.5bn the previous month
with a modest gain for exports. There was still underlying unease
surrounding the trade outlook with exports still unable to make much
underlying headway and there were also expectations that trade would be a
small negative influence on the fourth-quarter UK GDP data.
There were no surprises from the Bank of England
as it held interest rates steady at 0.50% and also decided against any
further boost to the quantitative easing programme from GBP375bn. The UK
currency gained some underlying support from the decision not to expand
policy further, especially with expectations that the Federal Reserve
will continue to buy bonds in the short-term.
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. The imposition of negative rates by commercial
banks will also undermine franc support. An easing of Euro-zone
pressures will tend to lessen the potential for defensive capital
inflows into the franc, but the currency will gain at times as an
alternative to the Japanese currency.
The dollar was
unable to sustain a firmer tone against the franc and retreated to lows
close to 0.91 later in the week. With the US currency cushioned to some
extent by a weaker franc tone on the Euro cross with a move above 1.21.
There were reports that the Zurich Canton Bank was
setting negative interest rates on Swiss deposits, following the
example of some major banks last year and this had a significant impact
in weakening the Swiss currency. The ECB shift away from a potential
rate cut also undermined the franc.
|
| Australian dollar |
The Australian dollar
found support below 1.05 against the US currency and pushed to highs
near 1.06 despite struggling on the crosses. There was greater optimism
surrounding the Chinese economic outlook which also provided some degree
of support for the Australian currency.
The domestic data
releases provided no support for the currency with a wider than
expected trade deficit and a slight decline in retail sales for the
month, although international trends tended to dominate.
There
will be immediate support from greater optimism surrounding the Chinese
outlook, but confidence is liable to fade quickly and limit Australian
dollar gains.
Canadian dollar:
The US dollar was unable to push above the 0.99 level against the Canadian currency during the week before re-testing support below 0.9850
There were only limited domestic economic
releases with a sharp decline in building permits offsetting the
substantial gains seen the previous month while the PMI index edged back
above the 50 level for December.
Even with optimism surrounding
the fundamentals and potential capital inflows, the Canadian dollar
will find it difficult to sustain any significant gains.
Indian rupee:
The rupee was
initially able to hold a firm tone during the week and advanced
strongly late in the week as there were sharp Euro gains. The currency pushed to highs near 54.40, the highest since the opening of January.
There
was optimism surrounding capital inflows with solid inflows into local
stock markets with some expectations that there would be a cut in
interest rates. The rupee was still undermined to some extent by strong
dollar demand from oil refiners and background doubts surrounding the
trade account.
The rupee will gain near-term support from wider Euro resilience and hopes for capital inflows. It will still be difficult to secure strong local currency gains.
| Hong Kong dollar |
The Hong Kong dollar
edged slightly lower over the week as a whole, although ranges remained
very narrow with little movement away from the 7.75 area.
There
were further concerns over the threat of rising domestic inflation
pressures which would also increase underlying stresses on the currency
peg with the HKMA having only limited tools available to tackle the
inflationary pressures.
Inflation fears are liable to
continue, especially with aggressive monetary policies in the US and
Japan with medium-term speculation surrounding the Hong Kong peg.
Chinese yuan:
The
yuan maintained a generally firm tone over the week and the spot rate
briefly pushed to highs close to 6.22. There was evidence that the PBOC was continuing to resist more substantial gains.
Sentiment
was boosted by the stronger than expected trade data as exports rose an
annual 14%. Overall lending rose firmly for December, but here were
important reservations surrounding the underlying data as banking-sector
loan growth fell to a three-year low.
Despite a more confident
tone surrounding the economy, the yuan will find it difficult to make
much headway, especially with the PBOC likely to resist gains.
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