- USD: Bernanke Avoids Talking About Ending QE
- EUR: Risk of Weaker Data and EUR/CHF Rally
- EUR/GBP - Highest Level Since December 2011
- CAD: Business Grow More Optimistic in Q4
- AUD: Shrugs Off Weaker Housing Data
- NZD: Credit Card Spending Growth Slows
- JPY: Uptrend to Remain Intact Before BoJ Meeting
USD: Bernanke Avoids Talking About Ending QE
As we go to press Bernanke is still speaking in Washington. So far, currencies are holding onto their gains as he has made no mention of phasing out asset purchases this year. Cautious optimism is the best way to describe Bernanke's stance - the Fed Chairman talked evenly about the gradual improvements in the U.S. economy but also expressed concerns that growth isn't strong enough and the labor market has a long way to go before reaching satisfactory levels. He talked about how more work needs to be done on fiscal policy but warned that overly aggressive spending cuts could weaken the economy. The only clue that the Fed chairman may not be willing to give up monetary easing so easily was when he said the central bank has not run out of ammunition with the main rate at zero. He said securities purchases and communications could still be used to increase transparency and ease monetary policy. Yet along these lines, investors shouldn't make too much of these comments since Bernanke also admitted that the Fed must be vigilant toward asset price bubbles. Bernanke is still speaking and could say something to affect the dollar but so far, it appears that he is deliberately trying to avoid addressing the discussions held at the last FOMC meeting about ending asset purchases this year. Aside from Bernanke, Fed President Evans and Lockhart also made comments on monetary policy in the past 24 hours. Evans, who is a FOMC voter this year said interest rates will remain low until 2015. Lockhart, who is not a FOMC voter said it is wrong to call current policy QE infinity because renewed open-ended bond buying comes with a lot risks.
Meanwhile concerns debt ceiling are back on the table. Treasury secretary Geithner said special measures to avoid breaching the debt ceiling may end by mid February, early March and therefore Congress needs to act quickly. President Obama also used the last press conference of his first term to urge Congress to raise the ceiling or risk a plunging the U.S. economy back into recession. He said talk that the GOP could oppose raising the debt ceiling is "irresponsible" and "absurd." According to GOP officials, more than half of their members are prepared to allow the U.S. to default unless President Obama agrees to dramatic spending cuts. This possibility was confirmed by the comments made by House Speaker John Boehner who said the "debt ceiling can't be raised without spending cuts." At this stage, it looks like the debt ceiling talks could erupt into another war between Republicans and Democrats that leaves the U.S. economy and the financial markets caught in the middle. Four of the highest ranking Senate Democrats encouraged Obama to bypass Congress to prevent a default. While Obam said that he will prioritize government bonds over other obligations, there's a very good chance that the U.S. government will run out of money by the end of February. As a result, in the coming weeks, politics will have a growing impact on currency flows.
In the meantime, all eyes are on Tuesday's economic reports. Consumer spending is the backbone of the U.S. economy and the only reason why investors obsess over the labor market is because they hope that stronger job growth will translate into stronger spending. Tomorrow's retail sales report is even more important because it covers the holiday shopping season. Economists are looking for spending to slow but we believe that the data could surprise to the upside because sales were strong according to the International Council of Shopping Centers and Johnson Redbook survey. Producer prices and the Empire State manufacturing survey are also scheduled for release but with inflationary pressures muted and manufacturing activity improving gradually, the only uncertainty is spending. Stronger than expected retail sales will help USD/JPY sustain its gains while weaker consumption could trigger a reversal in many of the major currency pairs.
EUR: Risk of Weaker Data and EUR/CHF Rally
Overnight, the EUR/USD climbed above 1.34 for the first time since February and at the time, everyone was excited about a potential rise to 1.35. Unfortunately the currency pair was unable to sustain its gains on the back of weaker industrial production. Manufacturing activity in the Eurozone dropped 0.3% in the month of November, causing the year over year rate to fall by the largest amount since November 2009. The biggest threat to the EUR/USD's breakout move is weaker economic data. Last week ECB President Draghi made it clear that they plan to keep monetary policy unchanged for the foreseeable future because the battle with the financial markets has been won. However, he may have to reconsider his plans if there is a consistent deterioration in economic data. Eurozone trade figures are scheduled for release tomorrow and we expected the surplus to increase. While the EUR/USD is always interesting, the big story today for the euro pairs was the big move in EUR/CHF, which rose a full cent to its highest level since December 2011. With no Swiss economic data on the calendar, the rally was driven entirely by stronger investor confidence. The shift away from talking about cutting interest rates to a more neutral monetary stance provided significant support to the euro while the reduction in tail risk encouraged investors to move out of the safety of Francs. Don't expect the Swiss National Bank to stand in the way of this move as its is exactly what they want EUR/CHF do. The rally can continue as long as euro risks do not return.
EUR/GBP - Highest Level Since December 2011
While the British pound continues to tread water against the U.S. dollar, EUR/GBP has been on a tear. The rally has been so strong that the currency pair has not seen one day of correction in the past 7 trading days. Today's breakout move took the pair to its highest level since December 2011. In early January we wrote about how EUR/GBP is one of our Top Trades of 2013 and explained at length about why reduction in Eurozone sovereign risk will be extremely positive for the pair. As long as fundamentals do not change, EUR/GBP could be headed even higher but that would also hinge on weaker economic data from the U.K. As the risk in the Eurozone recede, the challenges in the U.K. are becoming more apparent and this is the main reason why sterling underperformed the euro. This week, a number of key U.K. economic reports are scheduled for release and if they improve, EUR/GBP could finally halt its rise. However if the data is weak or gives the Bank of England reason to consider additional stimulus, then the next stop for EUR/GBP could be 85 cents. U.K. consumer and producer prices are scheduled for release tomorrow. Economists are looking for inflationary pressures to increase following a recent price hike by energy producers.
CAD: Business Grow More Optimistic in Q4
The Canadian, Australian and New Zealand dollars ended the North American session higher against the greenback. A handful of economic reports were released from the 3 commodity producing countries but all of these reports were Tier 2 economic data and therefore not exceptionally market moving for their currencies. In Canada, businesses grew significantly more optimistic about future sales in the fourth quarter which is consistent with the sharp rise in the IVEY PMI report but still surprisingly strong considering that it was compiled before the U.S. Fiscal Cliff deal. However the report was not entirely positive because the sentiment was far from exuberant as many Canadian business executives expressed concern about demand and increased competition. In New Zealand, credit card spending growth slowed, a sign that holiday shopping didn't live up to expectations last year. As for Australia, housing market activity deteriorated in the month of November and job ads declined at a faster pace. While stronger Chinese data reduced the chance of a rate cut from the RBA in the first quarter, weaker domestic conditions keep the risk alive.
JPY: Uptrend to Remain Intact Before BoJ Meeting
The Japanese Yen ended the day lower against all of the major currencies with the exception of the British pound and Swiss Franc. New milestones were reached in the Yen. Overnight, the Yen dropped to its lowest level since June 2010 against the dollar and its lowest since May 2011 against the euro. As a direct result of Yen weakness, we have seen AUD/JPY climb to a 4-year high and GBP/JPY climb to a 2.5 year high. The prospect of more aggressive monetary policy by the Bank of Japan this year continues to be the primary driver behind yen weakness. Over the weekend, Prime Minister Abe reiterated his desire to find a replacement for BoJ Governor Shirakawa with someone who "can push through bold monetary policy." While he said nothing new, with the BoJ meeting less than a week away, investors are eager to see how aggressive Shirakawa will be given that his term ends in April. By now, everyone expects the central bank to adopt a 2% inflation target but the real question is whether he will outline a convincing plan to achieve that goal. If he fails to do so, investors could punish USD/JPY. In the meantime, Yen crosses have run up against resistance but a deep pullback is unlikely before the BoJ meeting.