| Weekly Market analysis |
Monetary
and exchange rate policies will continue to be an important short-term
focus. There will be pressure on the US Federal Reserve to at least
slow the rate of quantitative easing to help ease the pressure on other
central banks. There will also be demands for the ECB to take a more
aggressive stance and curb any Euro gains, especially with growth still
very weak. There will be the risk of a sharp increase in global currency
tensions with the ECB very reluctant to get involved in exchange rate
management.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Wednesday February 13th | 10.30 | Bank of England inflation report |
| Wednesday February 13th | 13.30 | US retail sales |
| Thursday February 14th |
| Bank of Japan monetary policy decision |
| Friday February 15th | 09.30 | UK retail sales |
Dollar:
The US economy
has slightly been out of focus with evidence of solid economic growth
and Fed policy firmly on hold. Developments will, however, be watched
very closely over the next few weeks, especially with some speculation
that the Fed will hint towards ending quantitative easing this year.
Any shift in rhetoric by the Fed would be important in boosting
underlying confidence in the dollar, although market volatility will
also increase. There will still be uncertainties surrounding fiscal
policy and the threat of sequesters. The US currency will gain support if underlying confidence in the global economy deteriorates further.
The dollar was
able to recover during the week as the Euro was subjected to a
significant correction as it retreated to the 1.34 area from a peak
around 1.37.
The headline US employment report was
marginally weaker than expected with non-farm payrolls increasing by
157,000 for January while the unemployment rate edged up to 7.9% from
7.8%. There was, however, an upward revision to 196,000 for December and
the data overall continued to suggest solid growth. There was also a
stronger than expected manufacturing ISM reading with an increase to
53.1 from 50.2.
The latest US ISM index for the
non-manufacturing sector was close to expectations at 55.2 from 55.7 the
previous month. There was a robust reading for the employment
component, but the orders index was less impressive. Jobless claims
edging slightly lower to 366,000 in the latest week from a revised
371,000 the previous week.
Regional Fed President Evans commented
that he was looking for sustained employment growth of 200,000 per
month. If achieved, there would be a case for scaling down the
quantitative easing programme before the unemployment rate reached 7%.
Given recent payroll data, the comments will increase speculation that
there could be a move to ending bond purchases before the end of 2013.
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| Euro |
Immediate
fears surrounding the Euro-zone financial sector remain lower and there
has been some improvement in the PMI indicators. Peripheral economies
are still in recession however, with the social tensions of rising
unemployment continuing to increase. Political stresses have also
increased again with corruption allegations in Spain and a tightening
Italian election campaign. The ECB will be extremely reluctant
to engage in exchange rate targeting, but political pressure for a
response will increase, especially from France. Tightening monetary
conditions will also increase the possibility of an interest rate cut.
The
Euro corrected weaker, especially following Thursday’s ECB meeting with
a sharp correction on the main crosses, especially against Sterling and
the yen.
The latest Spanish unemployment data recorded
an increase in jobless claims of over 130,000 for January following a
decline of 59,000 the previous month. There were further important
concerns surrounding the Spanish political situation as opposition
parties called for the resignation of Prime Minister Rajoy over alleged
corruption and hidden payments to PP officials. There was a sharp rise
in Spanish benchmark bond yields to above 5.3% which had a negative Euro
impact.
The Italian banking and political situation
also remained an important focus with the PD party attempting to
minimise damage from the Monte dei Paschi affair. There were further
concerns surrounding potential deadlock following this month’s election.
There was initial relief surrounding the Euro-zone PMI data
with an improvement in the final PMI services index from the flash
reading. There was a significant improvement in the Spanish data, but
there was a sharp deterioration in Italy and a weak reading in France,
maintaining fears surrounding divergence within the Euro-zone. French
Prime Minister Hollande stated that a rising Euro may deepen the
recession and made calls for the Euro to be managed.
As expected the ECB left
interest rates on hold at 0.75% at the latest council meeting with
attention focussed on the press conference. Draghi remained generally
cautious surrounding the economic outlook and was generally dovish
surrounding the inflation outlook. An important market focus was on the
level of the Euro and whether there would be any comments protesting
against the currency’s strength. The ECB president was extremely
cautious in his response to questions. He did state that the exchange
rate was important for growth and price stability. In this context,
markets interpreted this to mean that the ECB was uneasy surrounding the
Euro and the stronger exchange rate which could increase the chances of
an interest rate cut.
In response, the Euro weakened sharply
with a string of stop-loss selling pushing the currency to lows below
1.34 which was the sharpest one-day decline since June.
Yen:
The government will
maintain strong pressure on the Bank of Japan to pursue a more
aggressive monetary policy and combat deflation with the new 2%
inflation target. The appointment of the new Bank of Japan Governor will
be watched very closely and the government will be looking for a dovish
appointment. There are, however, major fears within Japan over the
implications of a sharp sell-off in the bond market and there will be
pressure for aggressive policy changes and appointments to be resisted.
In this context, there is still the potential for sharp corrective yen
gains following recent sharp losses.
The yen weakened to fresh
30-month lows around 94 against the dollar and also weakened to the 127
area against the Euro before a sharp correction stronger.
Bank of Japan Governor Shirakawa stated
that he would leave office on March 19th, three weeks ahead of the
official end date. Two deputy governors are also due to leave on that
date which was the rationale for the change, but there was additional
speculation that the government had exerted pressure for an early
departure.
The Bank of Japan remained an important focus
with speculation over the next Bank Governor. Prime Minister Abe will
continue to push for a dovish appointment. There was, however,
speculation that there was important internal opposition to such an
appointment given fears of bond-market destabilisation.
There
was further speculation that Japanese institutions would scale-back the
proportion of Japanese bond holdings which had a negative underlying yen
impact.
The December current
account was in deficit for the second successive month which pushed the
annual surplus to the lowest level since 1985 which will maintain
underlying speculation over a longer-term yen weakening trend.
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| Sterling |
There
will be some reduction in fears surrounding the threat of a triple-dip
recession. There will, however, be fears that growth will remain
extremely weak over the next few months and this will have a further
extremely important negative impact on the government borrowing
situation. The underlying deficit remains at unsustainable levels and
there is an extremely high risk that the AAA credit rating will be
lost. There will be strong pressure on the Bank of England to maintain a
highly-expansionary monetary policy with the possibility of further
quantitative easing. Overall, Sterling will remain vulnerable to further
selling.
Sterling initially remained under pressure
before finding some relief mainly against the Euro with a recovery back
towards the 0.85 area.
The services-PMI index increased
to 51.5 for January from 48.9 the previous month despite some negative
impact of snow disruption. The data helped ease immediate fears
surrounding the threat of a triple-dip recession. There were, however,
concerns that growth would remain generally very weak with little in the
way of momentum.
Bank of England Governor-designate Carney was
subjected to extensive grilling in testimony to the Treasury Select
Committee. The opening statement had a big impact with Carney commenting
that there would need to be an exit from un-conventional measures which
increased speculation over a more hawkish policy tone. The underlying
Carney comments were more dovish with expectations that monetary policy
would remain extremely loose for the foreseeable future.
The Bank of England
left interest rates and quantitative easing on hold at the latest
policy meeting. Unusually, there was a statement released with the
decision. The bank was concerned that inflation would stay above the 2%
inflation target, but there were also concerns surrounding the growth
outlook and that meeting the inflation target would cause unnecessary
damage to the economy. This was a generally dovish stance, but Sterling
was able to prove resilient and consolidated in the 1.57 region while
there was a strong recovery against the Euro to the 0.8525 area.
Swiss franc:
There
will be unease surrounding the growth outlook, especially with the
economy struggling to find any significant traction from exports with
weak Euro-zone demand and a lack of competitiveness. Immediate defensive
flows into the Swiss franc are likely to remain lower, but there has
been no evidence at this stage that there has been any sharp drop in
reserves which does not suggest a major reversal in flows. Renewed
Euro-zone stresses could quickly trigger a resumption of upward pressure
on the Swiss franc.
The dollar found support below 0.91
against the franc during the week before moving back to the 0.92 area as
the Swiss currency consolidated around 1.23.
National Bank
member Zurbrugg stated that there would be no move to negative interest
rates to help alleviate pressure on the 1.20 Euro minimum level.
Although theoretically positive for the franc, the comments suggested
that the central bank may now be less concerned surrounding the threat
of uncontrolled inflows.
There was an improvement in the SECO confidence
index to -6 from -17 the previous quarter. The slightly more dovish ECB
tone will end to provide some degree of franc support. There was little
change in the latest reserves data which suggested that there had not
been any significant outflow from Swiss assets.
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| Australian dollar |
The Australian dollar
was unable to make any headway above the 1.0450 area against the US
dollar during the week and retreated sharply over the second half with
3-month lows below the 1.03 level against the US currency. The Reserve
Bank left interest rates on hold at 3.0% at the latest policy meeting,
but the statement did offer the potential for further cuts over the next
few months..
The economic data was generally weaker than
expected with a drop in building approvals and a third successive
monthly decline in retail sales. There was some relief surrounding the
latest labour-market data, but with a drop in full-time jobs.
Given
concerns surrounding the regional and domestic growth outlook and
housing fears, the Australian dollar is likely to remain generally
vulnerable to further losses.
Canadian dollar:
The US dollar
was generally confined to narrow ranges during the week, but did find
support on dips to below 0.9950 and pushed higher on Thursday as oil
prices fell.
There was a stronger PMI reading, but there
was a drop in building permits which increased unease surrounding the
housing sector and did have a negative impact.
There are likely
to be increased concerns surrounding the domestic fundamentals with a
particular focus on the housing sector curbing Canadian dollar support.
Indian rupee:
The
rupee maintained a firm tone for much of the week and tested 3-month
highs beyond 53 against the dollar before dipping weaker again. Optimism
surrounding the government’s NTPC power-company sale was offset by a
decline in the local equity market for five of the last six sessions.
The government was
also more cautious over the growth outlook with a forecast that GDP
growth could be as low as 5% which dampened interest in the currency.
The
rupee will find it difficult to secure strong currency gains given that
there will be further concerns surrounding the growth outlook and
structural deficits.
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| Hong Kong dollar |
The Hong Kong dollar found support around 7.76 against the US currency and consolidated around 7.7550 over the second half of the week.
There
were still longer-term concerns surrounding the potential inflation
threat until there was any underlying policy shift by the Federal
Reserve.
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 was confined to relatively narrow ranges during the week with a
consolidation just beyond the 6.23 area against the US currency. The PBOC continued to resist any significant yuan appreciation with caution ahead of the Lunar holiday.
There
were reported net capital outflows during 2012 which maintained some
underlying caution surrounding the Chinese currency. There was also
speculation that the PBOC would look to maintain competitiveness given
the sharp yen depreciation over the past few weeks even though the trade
data was stronger than expected.
Given pressure to maintain competitiveness, the yuan is unlikely to make significant gains with near-term activity severely limited by the Lunar New Year holiday.
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