| Weekly Market analysis |
The Euro has
continued to gain support from an easing structural risks and an
improvement in yield considerations with some return of capital. There
has also been further speculation that the Euro would gain be default
given the aggressive monetary policies in the US and Japan. There will
still be important vulnerability surrounding the Euro-zone,
especially given the political considerations and risk conditions are
liable to deteriorate again over the next few weeks with Asian unease
also likely to increase.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Tuesday February 5th | 03.30 | Australia interest rate decision |
| Tuesday February 5th | 09.30 | UK PMI index services |
| Thursday February 7th | 12.00 | Bank of England interest rate decision |
| Thursday February 7th | 12.45 | ECB interest rate decision |
Dollar:
The US GDP data
has unsettled confidence given the unexpected contraction, but the
economy overall is still likely to make solid progress. The PMI data has
been generally favourable and there will be relief surrounding
investment and housing trends. There will be some unease surrounding
consumer spending trends. The Federal Reserve remains committed
to aggressive quantitative easing in the short-term through monthly bond
purchases, but there will be some pressure for the Fed to moderate
policies later in the year. The Fed will also be subjected to
international pressures given underlying currency tensions. The dollar
will gain some defensive support if fears surrounding Asian growth
increase again.
The dollar remained on the defensive
against the Euro with losses to beyond 1.36, although the US currency
was more resilient on a trade-weighted basis.
The headline US
durable goods order data was stronger than expected with a 4.6%
increase from 0.8% previously while there was a core 1.3% increase for
underlying orders which triggered some boost in confidence surrounding
investment levels despite the uncertainties surrounding future Boeing
orders.
In contrast, the latest GDP data was weaker than
expected with a contraction of 0.1% for the first quarter compared with
expectations of around 1%. There was an increase in final demand and the
data was undermined in part by a sharp drop in defence spending which
suggested that the underlying data was stronger.
The Federal Reserve
announced that it would continue its programme of bond purchases at
US$85bn per month in the short-term. The Fed was slightly more confident
surrounding the growth outlook with a modest labour-market improvement
and the Fed also suggested that financial risks had declined. Kansas
City President George dissented from the decision due to concerns that policy accommodation would increase longer-term inflation risks
The latest US ADP employment
report was stronger than expected with a headline private-employment
estimate of 192,000 from a downwardly revised 185,000 the previous
month. There was an increase in US jobless claims to 368,000 in
the latest week from 330,000 previously. Looking at the moving average,
there were expectations of solid, but unspectacular employment growth in
Friday’s payroll report. The Chicago PMI index was stronger than expected at 55.6 from 51.6.
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| Euro |
Structural
fears surrounding the Euro-zone will remain lower in the short-term and
there has been a continuing decline in peripheral bond yields. The
growth outlook in Germany has certainly improved, but conditions within
the Euro-zone as a whole are still very difficult with peripheral
recession continuing while the French economic conditions are continuing
to deteriorate. There is also the threat of increasing political
tensions within Spain and Italy. Overall confidence in the Euro could
still falter quickly given the underlying growth vulnerability and there
will be pressure for the ECB to relax policy conditions.
The Euro moved
to 14-mnth highs against the dollar and advanced strongly for the week
as a whole with a further shift in underlying positioning.
The
latest Euro-zone money supply data recorded a slowdown in M3 growth to
3.3% from 3.8% the previous month while lending contracted for the eight
successive month with a 0.7% annual decline. The data will reinforce
unease surrounding monetary growth and the sharp drop in lending to
non-financial institutions will be particularly alarming. There will be
continuing fears that real economic damage be damaged and there will
also be concerns over any further tightening of Euro-zone monetary
policy through a stronger exchange rate or early LTRO loans repayments.
The ECB data did not suggest that there had been a switch to shorter-term lending to replace the LTRO funds.
The troika will
examine the Spanish banks to assess the burden of bad loans and there
will be further unease surrounding the housing sector as transactions
remain extremely low and prices continue to decline. There was also a
very sharp decline in Spanish retail sales.
Following a much weaker than expected German retail sales
report, underlying sentiment was boosted by the stronger than expected
unemployment data with a seasonally-adjusted decline of 16,000 for
December.
There were some fresh concerns surrounding the banking sector following weaker than expected Deutsche Bank earnings.
There were also further concerns surrounding the Monte dei Paschi
situation, especially given the potential impact on the Italian general
election. There were also concerns that plans for monetary union,
already facing hostility from within Germany, would suffer a further loss of support. There were also some concerns surrounding allegations of illegal payments surrounding Spain’s governing party, but financial flows still provided important net Euro support.
Yen:
The Bank of Japan will
maintain an aggressive monetary policy in the short-term with a 2%
inflation target. The open-ended commitment to bond purchases is not due
to come into effect until 2014 and there will be further concerns
whether the central bank will actually deliver on the more aggressive
policies. The appointment of new Bank of Japan governor will be watched
extremely closely over the next few weeks and a dovish appointment would
fuel expectations of a substantially weaker yen, although internal
tensions would increase. The yen could still gain some support if global
risk appetite deteriorates.
The US currency continued to
gain significant underlying support from rising US Treasury bond yields
with benchmark yields testing the 2% area. Underlying yen sentiment
remained weak with solid interest in selling any significant rallies.
Asian currency policies will also remain an important focus with
countries such as South Korea likely to be increasingly uneasy over the
implications of yen weakness.
There was underlying speculation over a dovish Bank of Japan
Governor to replace Shirakawa in April which reinforced negative
underlying yen sentiment. Current Deputy Governor Yamaguchi stated that
it was not directly aiming to weaken the yen
The yen continued
to be undermined by expectations of fresh easing by the Bank of Japan
and a government commitment to drive the yen down in order to combat
deflation even if a weaker exchange rate is not an official policy.
There were major concerns surrounding the appointment of the next Bank of Japan governor.
Extremely negative sentiment and a flow of funds back into the Euro
pushed the yen sharply weaker again late in US trading with the dollar
moving to fresh 30-month highs above 92.20 as the Euro rose above
125.50. The yen also failed to gain any respite following the weaker
than expected Chinese PMI data.
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| Sterling |
There will be further concerns surrounding the UK growth outlook which will reinforce fears surrounding government finances. The PMI data will be watched very closely and another set of weak readings would reinforce growth-related fears. Markets will
remain on alert for signs of further quantitative easing and will also
be monitoring any possible switch to nominal GDP targeting as this could
trigger an even more aggressive monetary policy. Defensive capital
inflows are liable to weaken in the short-term which will maintain
underlying Sterling vulnerability and the currency is liable to lose
ground.
Underlying Sterling sentiment remained negative
following Friday’s weaker than expected GDP report with fears over a
triple-dip recession. The currency was also undermined further by
comments from incoming Bank of England Governor Carney who hinted that
monetary policy would remain extremely accommodative.
There were rumours of an imminent downgrading of the AAA credit
rating and widespread expectations that it was only a matter of time
before a downgrade was delivered which maintained the potential for
further net capital outflows. There was also be further speculation that
the Bank of England and government might consider a change in mandate to nominal GDP targeting.
The latest consumer lending data
was stronger than expected with overall lending rising to GBP1.7bn from
GBP0.1bn previously. There was also a stronger reading for mortgage
approvals and money supply growth which triggered some relief over
underlying consumer spending trends. There was also a small improvement
in the latest consumer confidence data.
Swiss franc:
There will be unease surrounding the growth outlook, especially in view of the KOF index
deterioration. Given that the Swiss franc was a key beneficiary of
defensive inflows during the Euro-zone crisis, there will be further
speculation of a reversal in flows now that tensions have eased. There
will be further debate over the merit of lifting the Euro minimum level,
although the National Bank will continue to be very reluctant to engage
in a policy of fine tuning through a small move in the minimum level.
The franc found support near 1.25 against the Euro as volatility remained higher. The dollar remained on the defensive and dipped to lows below the 0.91 level.
The latest KOF business
confidence index was weaker than expected at 1.05 from a revised 1.29
previously which will tend to increase concerns surrounding the growth
outlook and maintain pressure for franc gains to be resisted.
There was further speculation that the National Bank
would covertly aim to push the currency weaker. There was no
significant change in the latest central bank reserves data and there
will be some expectations that the bank will look to lower the Euro
proportion from close to 50%.
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| Australian dollar |
The
Australian dollar was confined to relatively narrow ranges during the
week with resistance on any move to the 1.05 area and it retreated to
below1.04. There was evidence of selling against the Euro which tended to undermine the currency and there were some longer-term doubts surrounding the Australian and Asian economy.
The
domestic economic data provided some support with gains in business
confidence and housing sales which provided some degree of relief
following a string of weak releases, but the manufacturing PMI data was
weak.
The Australian dollar is likely to remain generally
vulnerable on cross-related selling together with concerns surrounding
the regional and domestic growth outlook.
Canadian dollar:
The US dollar was unable to break above the 1.01 level against the Canadian dollar during
the week and moved back to lows below the parity level late in the week
with some degree of month-end Canadian dollar support.
The latest GDP data was stronger than expected with a 0.3% increase while there was a decline in producer prices.
The US currency
should be broadly resilient on valuation grounds, especially with some
increase in concerns surrounding the underlying Canadian fundamentals.
Indian rupee:
The
rupee registered a strong tone during the week and secured a net
advance for the month for the first time since September with gains
towards the 53 area. The Reserve Bank cut benchmark interest
rates by 0.25% to 7.75% which helped underpin sentiment and there were
net inflows into domestic stocks which supported the rupee.
There
were still concerns surrounding the budget situation with a deficit of
INR4.07trn for the first nine months of the fiscal year.
The
rupee will gain near-term support from wider Euro resilience and hopes
for capital inflows. It will still be difficult to secure further
strong currency gains.
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| Hong Kong dollar |
The
Hong Kong dollar dipped significantly during the week and retreated to
lows close to 7.76 before a recovery back to the 7.7550 area later in
the week.
There was some speculation that longer-term bets on a
revaluation of the Hong Kong dollar peg were being unwound. There were
still longer-term concerns surrounding the potential inflation threat,
especially with the Federal Reserve maintaining its quantitative easing programme.
There
may be an easing of immediate speculation surrounding the Hong Kong
dollar peg, but medium-term speculation will continue, especially given
inflation concerns.
Chinese yuan:
The yuan maintained
a generally firm tone over the week and the spot rate edged slightly
stronger with the PBOC tolerating small gains. Given the general US
dollar under-performance in global markets, the underlying yuan trend
was still subdued.
There were longer-term doubts surrounding the Chinese economy,
especially with Standard & poor’s warning over the risks of
over-investment by China which could lead to medium-term instability.
There was a weaker than expected release for the Chinese PMI index which
had some negative impact on confidence.
The yuan will
find it difficult to make much headway, especially with renewed concerns
surrounding the Chinese economy and pressure for a looser monetary
policy.
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