The main US data event today is the Dec trade deficit, likely a contraction to $46 billion from $48.7 in Nov, in part on oil prices 0.8% cheaper in the month, according to Bloomberg. The US faces a toss-up between better demand from China and elsewhere, good for exports, but also a less-weak domestic economy, which favors imports.
With so much happening on the institutional front, mere economic data has a hard time getting attention. Some analysts said yesterday that Draghi may have been positioning ahead of the EcoFin meeting next week (Feb 11-12) or G20 (Moscow, Feb 15-16). Before then, today the EU leaders complete a summit, or want to, on the EU budget. UK PM Cameron hijacked the summit and insisted on spending cuts and got, it seems, a ceiling of €960 billion, down from the original proposal of €1.047 trillion and even under the current level of €994. You have to wonder if Washington is watching Brussels. After all, the Tea Party would have been a great success if it had had a sane and focused leader like Cameron and avoided all that crazy social-issue stuff.
Just about everyone is marveling at the power of a few words. We don’t like to call Draghi’s comments “verbal intervention” because it sounds as though he intended to bring the euro down when a proper economist would just be pointing out that it’s only appropriate to consider whether the currency appreciation should change the risk assessment on inflation. But Draghi is a very smart guy so he probably did know it would bring the euro down, even if the economist’s statement about risk assessment is also, technically, neutral. Two birds with one stone, very clever... and far more clever than Trichet with his single word “brutal.”
Was Draghi actually threatening a rate cut specifically to lower the euro, as some say? Probably not, since the ECB doesn’t, technically, have a FX target or a FX policy. Drahgi has said before he doesn’t much care about the level of the euro. Again a central bank chief is saying nothing more than FX is a factor among many to be considered when making policy, whose real target is price stability. But it amounts to the same thing. If inflation keeps falling and if the euro keeps appreciating, Draghi has basically said the ECB will respond, and the public and the press are going to hold him to it. But remember, the ECB has had the correct conditions for a rate cut before and not taken the chance, for other reasons. We are impressed by Draghi wanting to keep rates the same in order to emphasize to markets and governments that they should not be relying on the central bank to keep the punch bowl filled, an implicit and explicit criticism of UK, US and Japanese policies. This is going to be a long story.
A shorter story is the peculiar Aso comment that the government didn’t know the yen would move so far. This sounds like poppycock on the face of it. Of course they knew, and why a top official would retreat at this moment (the Friday before the Chinese New Year, among other possible benchmarks) is completely murky. Unless the comment is withdrawn—and we already saw one withdrawal—the unwinding of positions could become massive, not only in the dollar/yen but euro/yen and other crosses. In fact, the crosses are the things to watch. Some analysts think the upcoming G20 and expected diatribes about currency wars could be the impetus for a retreat. Well, maybe. There is also the storm brewing with China over those islands, some of which are reportedly only the size of a double bed. Is somebody blackmailing Japan? The mind boggles.
Bottom line, we are back to having too much information and yet not enough of the right information to evaluate upcoming moves. At a guess, the drop in US yields will reverse as risk-on becomes the flavor of the day, and the dollar will not benefit. As for how to view the USD/CAD, we give up.
|SPOT||CURRENT POSITION||SIGNAL STRENGHT||OPEN DATE||OPEN RATE||POSITION GAIN/LOSS|
|USD/JPY||92.58||LONG USD||STRONG||10 /17/12||78.71||14.99%|
|EURO/JPY||124.17||LONG EURO||STRONG||11 /21/12||105.38||17.83%|