Weekly Market analysis - The Euro has continued to gain support from an easing structural risks

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.

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.

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 andgovernment 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%.

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 Eurowhich 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.

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Weekly Market analysis - Immediate fears surrounding the Euro-zone as financial risks have eased

Weekly Market analysis

There has continued to be an important easing of immediate fears surrounding the Euro-zone as financial risks have eased, at least for now.  This has triggered an exodus of defensive capital flows from currencies such as Sterling and the Swiss franc. Confidence may remain stronger in the very short term, but there are still very important policy risks surrounding the Euro-zone. Key events for the forthcoming week Date Time (GMT) Data release/event Wednesday January30th 13.30 US GDP (Q4 advance) Wednesday January 30th 19.15 US Federal Reserve policy decision Friday February 1st 09.30 UK PMI index manufacturing Dollar:  The US labour-market data has remained generally encouraging and there should be solid growth in the short term, although sharp downward revisions to some regional indices will cause concern.  The Federal Reserve will maintain a very loose monetary policy in the short term with bond purchases continuing. The Fed will, however, be under pressure to moderate quantitative easing slightly or take a firmer verbal stance if growth conditions improve further. There are still important battles surrounding automatic spending cuts with congressional tensions liable to increase again.  The dollar will gain some defensive support if fears surrounding the Asian growth outlook increase again. The dollar was generally firm on a trade-weighted basis, but the US currency was weaker against the Euro which tended to over-shadow the impact to some extent. There was further discussion of the debt ceiling with House Republicans holding a vote on whether to suspend the debt ceiling issue until the end of May. Approval lessened the immediate default threat which had some impact on underpinning risk appetite. There was a downward revision to the Chicago PMI index, matching a sharp downward revision to the Philadelphia Fed index which caused some unease surrounding the US outlook. The latest US jobless claims registered another decline to 330,000 in the latest week from 335,000 the previous week. The decline to a fresh 5-year low may have been influenced to some extent by seasonal considerations, but here will still be optimism over growth trends. The Markit PMI manufacturing index also increased to 56.1 from 54.0. The BIS stated that quantitative easing would risk being increasingly ineffective and any comments from Fed officials will be watched closely. Euro Structural fears surrounding the Euro-zone will remain lower in the short term. There has been a continuing decline in peripheral bond yields with a series of strong bond auctions.  There will be some uncertainties over the impact of an early repayment of LTRO funds. 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 economy is continuing to deteriorate. Overall confidence in the Euro could still falter quickly given the underlying growth vulnerability. The Euro pushed higher during the week with further support from gains on the crosses and it broke above the 1.34 level in early Europe on Friday. The Euro-zone data release offered important support with the German ZEW index rising sharply to 31.5 from 6.9 previously and this was the highest reading since May 2010. There was also a decline in yields for the latest Spanish bill auction and the government secured demand in excess of EUR20bn for the latest syndicated bond sale. There was, however, a further decline in Spanish house prices for the fourth quarter, maintaining fears over further losses in the banking sector. The Euro-zone data as a whole recorded an improvement in manufacturing and service-sector conditions according to the flash PMI data. There was a significant improvement in the German economy notably for services and there is likely to have been an improvement in peripheral economies, although still below the expansion threshold. In contrast, there was a further deterioration in the French readings, increasing fears surrounding the French outlook and competitiveness. There was also a rise in Spanish unemployment to 26% for the fourth quarter from 25% which will maintain unease over the Spanish outlook and potential social consequences. The Bank of Spain stated that there was a fourth-quarter GDP decline on 0.6%, confirming an annual decline of around 1.2%. There are likely to be some LTRO repayments over the next few weeks as banks look to repay funds that can now be accessed more cheaply in markets. There could be some positive impact on the Euro, although there will also be concerns that banks in peripheral economies will not be able to repay funds. Yen:  The Bank of Japan has introduced a 2% inflation target and will maintain an aggressive monetary easing. 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 very closely over the next few weeks.  The underlying economic fundamentals remain weak with a substantial trade deficit undermining the yen directly and triggering demands for a more competitive currency as political pressures continue. The Bank of Japan confirmed another raft of measures to combat deflation. The bank will switch to an open-ended commitment to buying assets next year and will also increase the inflation target to 2% with a commitment to reaching the inflation goal at the earliest possible time. The dollar found support just above the 88 level and rallied steadily as there was solid yen selling on rallies with vulnerability on the crosses. There were further expectations that there would be aggressive capital flows out of Japan, especially into emerging markets through Toshin funds. The overall evidence, however, was still mixed with no evidence of substantial capital outflows at this stage. There was a further Japanese trade deficit for December which took the 2012 deficit to a record JPY6.9trn as exports remained under pressure.  The data tended to maintain negative underlying yen sentiment and Deputy Economy Minister Nishimura sated that the yen correction was not yet over. There were some cautious comments from German Chancellor Merkel who was uneasy over the Bank of Japan becoming so engaged in currency issues and there was some criticism of the government stance to promote a weaker currency. Japan’s core consumer inflation reading was in line with expectations at -0.2% which will reinforce pressure for more aggressive policy action to meet the 2% inflation target and the dollar held above 90. Sterling There will be further concerns surrounding the UK growth outlook which will reinforce fears surrounding the government finances.  There have been calls from the IMF for a change in policy and overall confidence in economic policies is liable to deteriorate sharply, especially after the GDP contraction for Q4. There will be expectations of much-reduced defensive Sterling support in the short term, especially with Euro-zone fears easing and this could have an important impact in undermining Sterling. Sterling was on the defensive during the week with further losses against the dollar and Euro with four-month lows near 1.5750 against the US dollar. The headline UK government borrowing data was broadly in line with expectations. There was an underlying increase of over GBP7bn for the first eight months of the year with generally weak tax receipts. The substantial structural deficit will maintain fears over the UK AAA credit rating. There was also a weak reading for the CBI industrial survey with orders at -20. Bank of England Governor King stated that the Monetary Policy Committee could consider further quantitative easing. There were comments surrounding the bank’s remit with King stating that it was time to review the situation. He was particularly concerned as to how the MPC should balance short-term inflation and growth risks.  The latest labour-market data was stronger than expected as the headline claimant count fell by 12,100 for December to an 18-month low following a revised drop of 8,900 the previous month while the unemployment rate declined to 7.7% from 7.8%. The Bank of England MPC minutes were broadly in line with expectations with a 9-0 vote for unchanged rates and an 8-1 vote not to adopt further quantitative easing.  Some members expressed doubts whether any further quantitative easing would be justified. In contrast, there were further concerns surrounding Sterling’s level. Prime Minister Cameron’s European speech did not have a major impact, although there were some underlying concerns over potential negative implications for the economy if there is a prolonged period of uncertainty. There were further underlying concerns surrounding economy as the IMF called for a shift in fiscal policies and there was also unease surrounding the fourth-quarter GDP release with expectations of a further contraction. Chancellor Osborne was generally very cautious over the outlook, but pledged no change in policies. GDP fell a provisional 0.3% for the fourth quarter. Swiss franc:  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 Euro-zone tensions have eased. There will be further debate over the merit of lifting the Euro minimum level, although the National Bank is certainly very reluctant to engage in a policy of fine tuning. The Euro was able to secure net gains against the Swiss franc despite seeing a sharp corrective decline from highs above 1.25 and the US currency was broadly resilient. National Bank member Danthine stated that there was no scope to fine-tune the Euro minimum level which continued to dampen speculation over a short-term move to a 1.25 minimum level. There was still expectations that there would be a decline in defensive inflows, especially after the Danish central bank increased interest rates. Australian dollar The Australian dollar was unable to make any impression on resistance levels towards the 1.06 area and dipped significantly weaker later in the week. There was further evidence of position adjustment and an unwinding of long Australian dollar positions Domestically, the consumer inflation data was weaker than expected with a headline 0.2%  increase and a core reading of 0.6% which fuelled expectations of further Reserve Bank interest rates. The Australian dollar is unlikely to make much headway, especially with further rate-cut expectations and the risk of fresh concerns surrounding the Chinese outlook. Canadian dollar:  The US dollar was able to find support at lower levels and rallied strongly during the week.  There was some further unwinding of long positions and the core retail sales data was weaker than expected. As expected, the Bank of Canada held interest rates on hold at 1.00%. In the statement, there was a more dovish tone with Governor Carney stating that, although there was still a case for an eventual policy tightening, the bank was not expecting to reach full capacity until the middle of 2014 which triggered a scaling back of rate expectations which undermined the Canadian dollar. With a more dovish Bank of Canada stance, the US currency broadly resilient on valuation grounds despite optimism surrounding Canadian fundamentals.

Weekly Market analysis - Fears Surrounding Euro-zone as financial risks have eased

Weekly Market analysis

There has been an important easing of immediate fears surrounding the Euro-zone as financial risks have eased, at least for now.  There will be some optimism surrounding risk appetite, although confidence could still prove to be very fragile, especially given important structural vulnerability.  There will also be further concerns surrounding the US debt-limit negotiations over the next few weeks. Key events for the forthcoming week Date Time (GMT) Data release/event Tuesday January 22nd Bank of Japan interest rate decision Wednesday January23rd 09.30 Bank of England MPC minutes Friday January 25th 09.30 UK GDP (Q4 first estimate) Dollar:  The US economic indicators have been mixed, but have generally indicated solid growth, especially with a further decline in jobless claims. The Federal Reserve has continued to emphasise the importance of unemployment to its policy decisions and will continue bond purchases in the short-term. If growth continues to improve, there will be pressure for at least a modest slowdown in quantitative easing and rising bond yields would also provide some net dollar support.  The US currency could gain on defensive demand if debt-ceiling talks create renewed animosity, although there would also be potentially important implications for the US credit rating. The dollar was resilient against most currencies during the week, although it did decline to lows around 1.34 against the Euro. The US retail sales data was slightly stronger than expected with a 0.5% headline increase for December and a core increase of 0.3% while there was also a generally optimistic tone surrounding the housing sector. The New York PMI index was much weaker than expected at -7.8, although this is an erratic data series. Regional Fed Governor Rosengren stated that there could be policy tightening if the unemployment rate fell to 6.5%. Ratings agency Fitch stated that the US would be subjected to a formal ratings view for a potential downgrade if there was no agreement to raise the debt ceiling and political comments will remain under close scrutiny. The inflation data was marginally lower than expected with a headline decline in prices of -0.1% which will maintain the scope for the Federal Reserve to maintain an expansionary policy. The Beige Book release was also broadly in line with recent reports with growth described as modest or moderate in all the Fed districts. Housing starts increased to a fresh four-year high of 954,000 for December. There was also a sharp decline in jobless claims in the latest week with a reading of 335,000 the lowest for five years. In contrast, the Philadelphia Fed index was sharply weaker than expected at -5.8 from +5.8 the previous month. The data overall helped maintain a confident tone surrounding the economy and there was a rise in US Treasury bond yields. The dollar failed to secure much in the way of support, especially with German yields also increasing during the day which prevented an improvement in yield spreads. Fed Chairman Bernanke’s comments surrounding the economy were broadly neutral as he insisted that the Fed was not out of policy options even with interest rates close to zero. He stated that growth was showing some signs of improvement with quantitative easing having a positive impact, although it was described as early days. He promised that the bond-purchase programme would be reviewed on a regular basis while he did not expect inflation to be a significant issue as he kept all options open.

Euro

Structural fears surrounding the Euro-zone will remain lower in the short-term. There has been a continuing easing of peripheral bond yields with investor sentiment also improving which could trigger renewed capital inflows. The ECB is much less willing to consider a further cut in interest rates which will provide some Euro support. Growth concerns will, however, remain a very important focus and the drop in financing costs will also deter political action on structural reform.  In this environment, confidence could quickly deteriorate again, especially if political tensions intensify. The Euro maintained a strong tone during the week, although the bulk of the gains were on the main crosses as the US currency was relatively resilient. The currency was cushioned buy a sharp decline in bond yields at the latest Spanish Treasury bill auction. Prime Minister Rajoy stated that Spain would not need a bailout and was confident that the banking sector would not need additional funds. Outgoing Eurogroup head Juncker stated that the Euro was dangerously high. Euro-zone officials have generally stayed quiet on currency issues over the past few months and the Juncker comments will be taken as indicating that there is now greater concern surrounding the exchange rate. There will also be some unease that this signals a new phase in potential global currency wars. ECB council member Nowotny stated that there was no cause for concern surrounding the Euro, contradicting Juncker’s comments. Nowotny also stated that he didn’t expect to see a long-term rise in the Euro against the dollar.  The ECB remains reluctant to get involved in exchange rates and will certainly not want to get in the business of targeting exchange rates. There will, however, be some speculation that the ECB will be more willing to consider a cut in interest rates if there are significant currency gains, especially as there will be a further deflationary impact. 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 the forthcoming meeting. There will also be scope for a further monetary easing. Comments from government officials will be watched very closely, but the net stance is likely to be to back further yen losses.  Markets have priced in substantial policy easing and there will be scope for a sharp correction, especially if risk appetite deteriorates. The yen briefly corrected strongly during the week before being subjected to renewed heavy selling pressure. There were significant comments from Finance Minister Amari who stated that excessive yen weakness could have a negative impact on the economy by pushing up import prices which suggested that the government would not push for further aggressive yen losses. Later in the week, Finance Minister Amari back-tracked from earlier comments warning against excessive yen depreciation and there will also be market confusion over government intent. There were still widespread expectations of further aggressive Bank of Japan monetary action next  week as underlying sentiment remained extremely weak.  There were some media reports that the central bank could consider dropping paying interest on excess reserves and would consider an open-ended commitment to bond purchases. The government and Bank of Japan are working on a joint statement and there were also comments from government officials that a rate of 100-110 would be appropriate  which triggered a test of yen support beyond the 90 level with fresh 29-month lows.

Sterling

There will be further uncertainty surrounding the UK growth outlook with speculation that there will be a fourth-quarter contraction which will reinforce fears surrounding the government finances. There will also be persistent unease surrounding the threat of a credit-rating downgrade.  Sterling has been an important beneficiary of defensive support during the Euro-zone crisis and there will be further suspicions that there will be sustained capital outflows given that Euro-zone fears have eased.  Given the underlying lack of confidence in the fundamentals, the UK currency is likely to be subjected to underlying selling. Sterling was firmly on the defensive against the Euro during the week as it retreated to nine-month lows beyond 0.8370. Sterling also retreated to six-week lows below 1.60 against the dollar. There were further concerns surrounding the AAA credit rating with Fitch warning that the downgrade risks were increasing. The headline UK consumer inflation rate was in line with expectations at 2.7% while the core rate edged down to 2.4% from 2.6% and the overall impact was limited with no implications for monetary policy. There was a slightly more optimistic tone surrounding the housing market as the official index recorded a 2.1% increase in the year to November. The latest RICS housing data was stronger than expected with a reading of zero for December from -8% previously which was the first time a negative figure had not been reported since July 2010. The other economic data was generally weaker than expected. There was only a small recovery in industrial production for November as a recovery in energy-sector output was offset by another decline in manufacturing production which reinforced unease surrounding the outlook. The NIESR estimated a 0.3% decline in GDP for the three months to December and there was another weak reading for construction output which reinforced fears surrounding a fourth-quarter GDP contraction. Swiss franc:  The Swiss franc was a key beneficiary of defensive inflows during the Euro-zone crisis and there will be further speculation that there will be a sharp reduction in defensive inflows. There will be scope for a reversal in speculative capital inflows which could trigger fresh selling on the Swiss currency. There will, however, be the potential for a reversal in trends if Euro-zone fears intensify again.  The Swiss currencycould also still gain support as an alternative save-haven asset, especially with the Japanese yen weakening sharply. The Swiss franc weakened sharply during the week with very sharp losses to beyond 1.25 against the Euro. The dollar was able to take advantage of the franc vulnerability and pushed to a peak near the 0.94 level. There was a decline in defensive demand for the franc given reduced fears surrounding the Euro-zone structural vulnerability. There was a rise in yields on the latest Swiss Treasury bill auction which suggested that defensive franc support had eased and there was also a shift in risk reversals which indicated that underlying Swiss currency demand had fallen. The latest retail sales data recorded a 2.9% annual increase  in the year to December which did not have a significant impact. There was a 0.2% decline in consumer prices for December to give a 0.4% annual decline which will reinforce potential deflation fears and a determination to prevent franc gains

Australian dollar

The Australian dollar was unable to break above the 1.06 area and weakened to lows just below the 1.05 level before consolidating in the middle of the range. The currency was unsettled by a weaker than expected labour-market report as there was a decline in employment fell by over 5,000 while the unemployment rate rose to 5.4%.  The other data also provided little in the way of support The currency was still cushioned by a generally solid tone towards risk appetite and a lack of interest in the US currency. Despite some support from greater optimism surrounding China, the Australian dollar is unlikely to make much headway, especially with further rate-cut expectations. 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, although the main feature was generally very narrow ranges. There was a recovery in gold and oil prices which provided some degree of support for the Canadian currency. Relatively narrow ranges are liable to continue for now with the US currency broadly resilient on valuation grounds despite optimism surrounding Canadian fundamentals.

Weekly Market analysis - ECB is significantly more optimistic

Weekly Market analysis

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.  ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Weekly Market analysis - Fed minutes have injected a greater mood of uncertainty

Weekly Market analysis

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. TheBank 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 Euroand 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 datato 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.  ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.