The greenback strengthens versus yen and knocks euro to fresh 2014 lows: Dec 22, 2014

Market Review - 19/12/2014 18:55GMT

The greenback strengthens versus yen and knocks euro to fresh 2014 lows

The U.S. dollar continued to climb against the Japanese yen on Friday, after the Bank of Japan (BoJ) maintained the level of its stimulus program. BoJ as widely expected, kept rate unchanged and said that it will boost its monetary base at an annual pace of 80 trillion yen.

U.S. dollar found support at 118.82 in Tokyo morning and then jumped to 119.37 after the BoJ's monetary policy announcement. The greenback continued to climb in Europe and hit a high of 119.50 before cross-buying of yen knocked price down to 118.84. Later, U.S. dollar managed to hold gains versus the yen and rallied to a fresh intra-day high of 119.62 in New York morning.

BoJ said in a statement after the announcement of monetary policy decision – 'keeps monetary policy steady, pledges to increase monetary base at annual pace of 80 trln yen; BoJ's policy decision was made by 8-1 vote; BoJ board member Kiuchi votes against keeping policy steady, says policy before Oct 31 easing was appropriate; BoJ board member Kiuchi proposed making 2% inflation target a medium- to long-term goal, which was turned down by 8-1 vote; BoJ raises economic assessment; raises assessment on output and exports; Japan economy continues to recover moderately as a trend with effect of sales tax hike waning as a whole; exports showing signs of pickup, output seems to be bottoming out; business sentiment generally favourable although some cautiousness has been observed; capex has been on a moderate rising trend as corporate profits improve; private consumption remains resilient as a trend with effect of sales tax hike waning as a whole.'

Later in the day, BoJ's Governor Kuroda said in the press conference, 'fall in oil prices will help push up consumer prices in long term; still see high chance of meeting price goal in period centred around next fiscal year; given fall in oil prices, may be hard to imagine inflation accelerating in first half of next year; Russia's economic situation won't have much direct impact on Japanese economy; no one expects repeat of 1998 crisis from sharp fall in rouble; sustained wage increases crucial for sustained price gains; output gap, inflation expectations key factors in determining price, wage trends.'

The single currency was under pressure on Friday. Investors shrugged off the release of upbeat German consumer sentiment data as demand for the greenback remained broadly supported by expectations for a U.S. rate hike next year after the latest FOMC statement. The single currency edged lower European morning high of 1.2298 to 1.2260 before cross-related buying in euro lifted price. Later, despite rebounding to 1.2302 in New York morning, renewed broad-based strength in usd knocked price down to a fresh 27-month trough at 1.2220 ahead of New York close.

A survey from Market Research Group Gfk showed on Friday that German consumer sentiment hit its highest level in eight years heading into January as shoppers expect Europe's largest economy to gain momentum. GfK said its forward-looking consumer sentiment indicator rose to 9.0 going into January from 8.7 in December.

Cable retreated after a cross-inspired rebound to 1.5682 in European morning and then tanked to 1.5617 ahead of New York open. Despite 'euro-led' rebound to 1.5674 in New York morning, price later fell to a fresh session low of 1.5605.

In other news, Reuters reported comments from Fed's Kocherlakota who said 'Fed is creating unacceptable downside inflation risks; Fed's failure to respond to weak inflation risks credibility of inflation target; would be hard to reverse harmful slide in inflation; Fed should have vowed to keep rates at 0 so long as inflation outlook stays below 2%; Fed should have signaled willingness to buy more bonds if inflation stays low.'

Fed's Williams spoke in a Bloomberg radio interview n said '"patient" pledge a bridge to a time when closer to raising rates; we are getting closer to thinking about the pros and cons of raising rates; we will see inflation in 2015 well below 2%; Fed must look through short-term fluctuations because monetary policy works with a lag; policy lift-off will be driven by progress on jobs, and outlook on inflation; markets views of when lift-off might occur are "relatively reasonable"; as unemployment comes down, we would expect inflation to move back to target; longer-term inflation expectations are stable, and expect wage inflation to pick up; we have plenty of tools in case inflation disappoints on the downside; we can delay liftoff, or stretch out rate hikes once begun, if inflation disappoints; big part of drop in oil prices is due to increase in supply, which is positive for economy; lower gas prices are a "windfall" for consumers, will support spending; real US GDP will grow 2.5% to 3% next year; expect full employment by end of 2015; June 2015 seems like a reasonable time for raising U.S. interest rates; drop in oil prices is a "very big plus" for U.S. economy next year; U.S. economy can grow at above-trend pace, even if see continued weakness abroad; is seeing some signs of pickup in wage growth; core inflation will likely be below 2% when liftoff is appropriate; still-weak housing market is one reason fed needs to keep monetary policy easy.'

Fed's Lacker said 'drop in oil prices will increase consumer spending but will not be a sustained increase; progress of us economy will require higher real interest rates, and that time will come next year; as long as Fed confident it's heading toward 2% inflation goal, will need to set rates in a way real economic conditions warrant.'

This week will see the release of:

New Zealand's Westpac consumer survey, Japan's BoJ Monthly Economic Survey, Germany's Import Price Index, Italy's Trade Balance, Eurozone's U.S.'s Existing Home Sales on Monday.

New Zealand's Trade Balance, Exports and Imports, China's CB Leading Economic Index, France's GDP, Producer Prices, Italy's Retail Sales, U.K.'s BBA Mortgage Approvals, Current Account, GDP, U.S.'s GDP, Personal Consumption, Redbook, Housing Price Index, Reuters/Michigan Consumer Sentiment, New Home Sales, Personal Income, Personal Spending on Tuesday.

Australia's CB Leading Indicator, Switzerland's KOF Leading Indicator; U.S. Initial Jobless Claims on Wednesday.

Japan's BoJ Monetary Policy Meeting Minutes. New Zealand, Australia, China, Eurozone countries and North America are on Christmas Holiday on Thursday.

New Zealand, Australia, Italy, Germany, Canada are on Boxing day holiday on Friday.