Monetary and currency policies
will remain a very important focus following the Federal Reserve
decision to sanction additional quantitative easing during 2013 and
further action by the Bank of Japan. There will be further unease over
the implications of currency gains and resistance is liable to increase
which will risk fuelling a more aggressive phase of currency wars as
central banks look to resist currency appreciation.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Thursday December 27th
|
15.00
|
US jobless claims
|
Thursday December 27th
|
15.00
|
US consumer confidence
|
Dollar:
Fiscal policy
will remain important in the short-term as fiscal talks continue and
there is likely to be a deterioration in risk appetite which would
support the dollar if there is no progress. The Federal Reserve stance
will remain an important focus throughout the next few months and the
dovish policies will have a negative impact on the US currency as the
Fed continues its policies of bond purchases. There will still be
expectations that the US economy will out-perform the Euro-zone which
should provide some degree of dollar support. There has also been a
retreat in precious metals prices which suggests that underlying dollar
selling is likely to be contained.
The dollar remained
on the defensive for much of the week, but did find some respite as risk
appetite faded again as the Euro retreated from the 1.33 area.
Regional Fed Presidents Lacker and Fisher continued
to voice opposition to the recent additional quantitative easing. There
were, however, strong expectations that the dovish view would prevail,
especially with the doves maintaining a strong position on the 2013 FOMC
which will keep policy loose.
The US current account
deficit narrowed to US$107.5bn from a revised US$118.1bn the previous
quarter. As a percentage of GDP the deficit was below 3.0% compared with
a peak above 6% of GDP in 2005. There is the potential for a
medium-term decline in the deficit as the energy deficit narrows and the
US currency will be slightly less vulnerable to underlying selling.
The US jobless
claims data was slightly weaker than expected with an increase to
361,000 in the latest week from a revised 344,000 figure the previous
week. The other releases were stronger than expected with the
third-quarter GDP estimate revised up to 3.1% from 2.7%. In addition,
there was a stronger than expected reading for existing home sales at
5.04mn from 4.76mn the previous month while the Philadelphia Fed index
increased to 8.1 from -10.7 the previous month.
US budget
negotiations remained an important focus as the House of Representatives
debated the so called ‘plan B’. Speaker Boehner insisted that the House
had the votes to pass the bill while President Obama stated that it
would be vetoed. As the vote deadline approached, Boehner admitted that
he did not have enough support and the vote was cancelled as some
Republicans refused to back any tax increases. Further votes are not
scheduled until at least December 27th which triggered a sharp
deterioration in risk appetite on fears that the year-end deadline would
be missed.
Markets still expect that a compromise deal
will be reached eventually which helped cushion the impact, but
sentiment could deteriorate sharply if deadlock persists
Euro
|
There will be further relief
that the acute Euro-zone crisis phase has eased with the Greece debt
buyback completed while there has been a further decline in peripheral
bond yields. There is a very heavy schedule of peripheral debt issuance
during the first quarter of 2013 which will make it difficult for Spain
to resist a bailout. The underlying growth outlook remains extremely
weak which will maintain pressure for a more aggressive ECB policies.
Political tensions will also intensify with Italian elections likely in
February and the Euro will find it very difficult to make any sustained
headway given the net economic risks.
The Euro advanced
to 7-month highs against the dollar on an easing of Euro-zone fears and
improved risk appetite and peaked at 1.33 before edging lower.
ECB President Draghi was also
cautiously optimistic surrounding the 2013 outlook as Euro-zone
officials continued their attempts to play-up the economic prospects.
Draghi expressed confidence that competitiveness in Spain was starting
to improve and was optimistic over the benefits of a single bank
supervisor.
There was a further increase in bad debts within Spanish banking
sector as the ratio rose to a fresh historic high of 11.2% in November
from 10.7% previously which will maintain fears over the Spanish
outlook. For now, however, wider fears surrounding the Euro-zone have
eased which has encouraged a further drop in speculative short positions
against the currency and the Greek credit rating was revised to B- from
selective default with a stable outlook.
The German IFO
index was slightly stronger than expected with a second successive
monthly increase to 102.4 from 101.4. Although there was a lower than
expected reading for current conditions, the data maintained a more
favourable tone.
There was a further decline in peripheral bond
yields which helped underpin sentiment as Italian benchmark yields
declined to a two-year low. ECB member Asmussen stated that he would be
very reluctant to cut the deposit rate to below zero which cast some
doubt over the prospects for an ECB rate cut.
Yen:
The
LDP won a huge victory in the recent lower-house elections and the
strength of their majority should mean that they can over-ride any veto
attempt from the Upper House. The government will push ahead with
aggressive policies to combat deflation. There will also be intense
pressure on the Bank of Japan to take an even more aggressive
stance on monetary policy and the bank will consider an increased
inflation target early in 2013. These pressures will exert downward
pressure on the yen, but the currency could still gain at times when
there is a deterioration in global risk appetite.
The Japanese election
result recorded a major LDP victory as they won 294 of the 400 seats in
the lower house with their partner winning a further 30. The results
give the coalition a two-thirds majority and this is extremely important
as the government can over-rule opposition from the Upper House
The
latest trade data recorded a headline deficit of JPY953bn from a
revised JPY549bn previously as exports recorded a 4.1% annual decline.
The data reinforced fears surrounding the export outlook and reinforced
negative yen sentiment.
The Bank of Japan announced a
further JPY10trn in quantitative easing which was in line with market
expectations. There is still a high degree of pressure on the central
bank to take additional steps to boost the economy and sanction
additional policy measures. Incoming Prime Minister Abe stated that the
central bank was carrying out policy steps sought by the government one
at a time in a clear reference to the government expecting further
action. The administration is planning an emergency economic package in
January and the yen remained under heavy selling pressure.
The yen found
support towards the 84.50 area against the dollar and recovered ground
as risk appetite deteriorated sharply following the collapse in US
fiscal cliff talks. The US currency moved back to the 84 area as the
Euro retreated to below 111.
Sterling
|
There will be further unease surrounding the UK economic outlook
with expectations of a weak fourth-quarter. There will be major
uncertainties surrounding Bank of England policies and there will
certainly be pressure for the central bank to maintain an aggressive
stimulus policy to underpin demand. There will be speculation over a
shift towards nominal GDP targeting when Carney takes over as Governor
later next year. The UK currency will continue to gain some protection
from the aggressive policies pursued by other global central banks, but
Sterling is unlikely to make significant headway.
Sterling was resilient during the week and challenged 3-month highs around 1.63 against the dollar before consolidating slightly lower.
There were further concerns surrounding the AAA credit-rating
following the Standard & Poor’s decision to downgrade the outlook
to negative and there was further speculation that the rating would be
lost during 2013. With the Federal Reserve increasing its bond
purchases and the Bank of Japan expand policy further this week, there
will be some initial Sterling support on relative grounds with
expectations that the Bank of England will hold policy steady in the
short-term..
The latest inflation data recorded an unchanged
annual rate of 2.7% for November compared with expectations of a
marginal decline. Although the RPI rate dipped to 3.0% from 3.2%, there
were some expectations that the stickiness in inflation would curb any
further quantitative easing by the Bank of England.
The Bank of England
minutes were broadly in line with expectations as the MPC voted 9-0 for
unchanged interest rates while there was a 8-1 vote in favour of
leaving quantitative easing on hold as Miles again voted for a further
£25bn expansion in bond purchases. The bank was generally pessimistic
over the growth outlook and warned over the stickiness of inflation.
There were also further calls for a weaker exchange rate with Sterling’s
gains described as unhelpful and a headwind for recovery and this is
likely to be an important issue during 2013.
The headline retail sales
report was weaker than expected with sales unchanged for November
following a revised 0.7% decline for October. There was also a sharp
decline in the latest GfK consumer confidence reading from -22 to -29.
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
resist franc appreciation to protect competitiveness. 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 pressure.
The dollar remained
firmly on the defensive against the franc and dipped to fresh 7-month
lows just below 0.91 before staging a weak corrective recovery. The Euro consolidated around the 1.2080 area with narrow ranges prevailing.
With
liquidity declining into the Christmas period there is likely to be an
increased reluctance to take on the National Bank and the 1.20 minimum
level and a potential for a further round of short Euro covering. There
were wider concerns surrounding the risk of renewed tensions during 2013
and the franc also gained support from a lack of attractive
safe-havens, especially with the yen under serious selling pressure.
|
Australian dollar
|
The Australian dollar
continued to probe resistance above 1.05 against the dollar during the
week, but it was unable to sustain the gains and retreated back to below
the 1.05 level. The currency was unsettled to some extent by a decline
in gold prices and dipped again when there was a deterioration in risk
appetite.
The monetary policy minutes suggested that the
bank could be cautious over further interest rate cuts, but Reserve Bank
Governor Stevens also continued to suggest that the currency was
over-valued and that it should be weaker.
There is likely to be resistance to currency gains with the Reserve Bank under pressure to push the currency weaker, especially if growth fears intensify.
Canadian dollar:
The Canadian dollar was unable to make further headway during the week and edged back to the 0.99 area as narrow ranges generally prevailed.
The latest retail sales data
was stronger than expected which provided some relief and oil prices
were generally firm, but a decline in gold prices had some negative
impact.
Even with near-term resilience and optimism surrounding
the fundamentals, the Canadian dollar will find it difficult to advance
from current levels.
|
|
|
No comments:
Post a Comment