| 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
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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
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. |
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