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While the dollar was boosted by the Federal Open Market Committee minutes last week, most
other major currencies are having their own problem. Sterling was the weakest as pressured
by the dovish Bank of England minutes as well as persistent chatter on the rating downgrade.
Indeed, Moody's did downgrade UK's AAA debt rating to AA1 towards the end of the week
and that should extend the plunge in the pound. The Euro was weighed down by a couple of factors
including uncertainties over Italy's election, weak economic data as well as disappointing
long-term refinancing operation repayment results. The Canadian dollar dropped sharply
as weak economic data reinforced the case that there will be no policy stimulus removable
any time soon. The New Zealand dollar was pressured by the Reserve Bank of New Zealand's
comments on intervention. Also, one important thing to note is that the Japanese Yen was
firm as partly helped by cross selling in yen crosses. More importantly, the failure
to ride on the G20 meeting to extend its downtrend argues then the yen has bottomed out at least
in the near term.
The Dollar was boosted by the Federal Open Market Committee meeting minutes last week.
The minutes for the January meeting indicated that policymakers were more upbeat on the
US economic outlook as driven by improved business confidence and household consumption.
Discussions on continuation of the asset purchase program remained hot. 'Several participants'
suggested that the central bank should be prepared to 'vary the pace of asset purchases,
either in response to changes in the economic outlook or as its evaluation of the efficacy
and costs of such purchases evolved'. 'A number of participants' stated that the program should
be tapered or ended before occurrence of a substantial improvement in the outlook for
the labor market in accordance with cost-benefit assessment. Yet 'several' members warned of
the potential costs of terminating and decreasing asset purchases too soon while 'a few' participants
cited past experience of negative impacts on economic growth, employment, and price
stability of the premature ending of accommodative measures. Besides this there were opinions
that the Fed might provide monetary accommodation by 'holding securities for a longer period
than envisioned in the Committee's exit principles, either as a supplement to, or a replacement
for, asset purchases'.
The Euro was weighed down by a couple of factors. Italy's parliamentary election on February
24th to 26th was a major factor: Democratic Party's Bersani is still the front runner
but polls have been showing that former prime minister Berlusconi's People of Freedom Party
continues to close the gap. Markets are expecting to see Bersani winning a majority in the lower
house and form a coalition with outgoing prime minister Monti in the upper house. However
markets are also complacent on the risk that scandal-mired Berlusconi might return to power.
The European Central Bank said that 356 banks will pay back 61.1 billion Euros on February
27th as early repayment of the second three year long-term refinancing operation. That's
way short of market expectations of 122.5 billion. Analysts said that would be a sign
that banks are not finding enough demand for credit inside the Eurozone which indirectly
indicates weak growth momentum.
While German ZEW and IFO were solid, Eurozone Purchasing Managers' Indexes triggered much
concern of a deepened recession in Q1. Manufacturing PMI dropped slightly to 47.8 versus expectation
of a rise to 48.4. Services PMI unexpectedly dropped to 47.3 versus expectation of a rise
to 49, hitting a three month low. The composite PMI dropped to a two month low of 47.3. Germany's
data was mixed with Manufacturing PMI rising slightly more than expected to 50.1 but Services
PMI dropped more than expected to 54.1. However France's data was worrying: While Manufacturing
PMI rose to 43.6, it missed expectation of 43.9. Services PMI even dropped to 42.7 unexpectedly
versus expectation of a rise to 44.5. Markit chief economist Chris Williamson noted that
"a steepening rate of decline in February is a disappointment, and suggests that the
Eurozone is on course to contract for a fourth consecutive quarter." And, "if it wasn't for
Germany, these would be really dire readings." Also, he said that the latest survey suggested
that the Eurozone economy would shrink 0.2% to 0.3% in Q1.
European Commission revised GDP forecast to a 0.3% contraction in 2013 down from a prior
projection of a 0.1% growth. Unemployment is expected to jump further up to 12.2%, revised
up from prior projection of 11.8%. The European Commission warned that the job market is a
serious concern and the social consequences will also weigh on growth perspectives. Domestic
demand is not expected to improve until 2013. Seven states are expected to contract this
year including: the Netherlands, Italy, Spain, Portugal, Greece, Cyprus and Slovenia.
The Bank of England minutes unveiled that Governor Mervyn King, Paul Fisher and David
Miles favored adding more stimuli to boost the economy but their proposal was rejected
by 6 other members. The pound weakened further while UK stocks and gilts rebounded after
the report amid expectations of more easing measures later in the year. Meanwhile, the
central bank indicated the possibility of using measures other than asset purchases
to boost the fragile economy in the future.
Moody's downgraded the UK's debt rating from AAA to AA1 and changed the outlook to stable.
Moody's said that economic growth in the UK will be "subdued" because of weak global activities,
as well as a drag "from the ongoing domestic public and private-sector Deleveraging process."
It noted that the period of sluggish growth "poses challenges to the government's fiscal
consolidation program, which we now assume will extend well into the next parliament."
Also the "rising debt burden" meant "a deterioration in the shock-absorption capacity of the government's
balance sheet, which is unlikely to reverse before 2016." Chancellor of the Exchequer
Osborne responded in a statement that "we have a stark reminder of the debt problems
facing our country and the clearest possible warning to anyone who thinks we can run away
from dealing with those problems."
The Yen recovered on news that Japan would not buy foreign bonds. Also traders took profits
on their short positions as they are waiting the nomination of the next Bank of Japan governor.
So far, prime minister Abe has kept his mouth shut on whether former deputy Bank of Japan
governor Muto or Iwata would be nominated as the next Central Bank governor and markets
are still keenly awaiting the decision. It's believed that Muto is seen by many as a less
aggressive option and would be more accepted by the opposition Democratic Party of Japan.
Indeed the Democratic Party's shadow finance minister Maehara said that they will not automatically
reject Muto. The Bank of Japan's minutes for the January meeting indicated that a few members
were reserved about the upgrades of the Japanese economic outlook. Meanwhile two Bank of Japan
members expressed that extending the maturity of bank bond buys was an option.
The Canadian dollar extended the recent decline against dollar after another round of weak
economic data. Retail sales dropped sharply by 2.1% in December much weaker than expectation
of 0.3%. Ex auto sales were also weak and dropped point 9% versus expectation of a 0.1%
rise. Consumer price index moderated more than expected to 0.5% year on year in January
while core CPI also moderated to 1% year on year.
The New Zealand dollar was weighed down by the Reserve Bank of New Zealand governor Wheeler's
comments today and recovery in Australian Dollar New Zealand Dollar helped lift the
Aussie mildly elsewhere. Wheeler warned that "when the New Zealand dollar is coming under
upward pressure, we want investors to know that the kiwi is not a one- way bet." And
he noted that the Reserve Bank of New Zealand is "prepared to intervene to influence the
kiwi" even though "given the strength of recent capital flows, we can only attempt to smooth
the peaks." He said that the G3's ultra loose monetary policies "are aimed at stimulating
growth but also have significant spillover effects," and many other countries are affected
as investors sought higher yields. Nonetheless, Wheeler noted that limitation of intervention
and a swiss-style cap isn't practical for the Kiwi. Finance minister English also said
last week that weakening the Kiwi through intervention against large scale speculation
is like being "out in the war zone with a peashooter."
The Reserve Bank Of Australia minutes released in the Asian session unveiled that recent
rate cuts have shown effective in boosting the economy while benign inflation might trigger
further rate easing. Regarding developments in China and Japan, the minutes stated that
"a wide range of indicators showed that growth in the Chinese economy had stabilized, underpinned
by public spending and somewhat stimulatory financial policies. There had also been indicators
of stronger growth of domestic demand" in East Asia with the exception of Japan. After
a parliamentary committee that last year's cuts were already "substantial" and rates
are at an "appropriate level right now". He emphasized that there is already a "good deal
of interest-rate stimulus in the pipeline" and the board judged that it was "sensible"
to allow time for the rate cut to "do its work". Meanwhile Stevens noted that the Australian
dollar exchange rate is "somewhat" overvalued. But he warned that "you need to be pretty
confident that it is seriously over-valued, or the market is behaving in some quite irrational
way, before you would launch large-scale intervention." Separately, Treasurer Swan said he's "beginning
to see some of the signs of stimulus flowing from monetary policy into some of the non-mining
sectors of the economy."