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There are some important points to note about last week's market developments. First off
it's a surprise that the dollar ended the week as the strongest currency, making gains
against all other major currencies. The news that the Republican Party agreed to lift the
debt limit for three months gave the greenback a late boost before the week ended. Secondly,
risk appetite continued to drive stock markets last week and sent the S&P 500 and FTSE 100
to five year highs. But the risk sentiments were not seen in commodity currencies. Instead,
steep selloff was seen in the Canadian dollar against the U-S dollar before weekend on the
above news. Thirdly, the Euro remained strong against other European majors and in particular
against the Swiss Franc. Key medium term resistance levels in Euro Swiss Franc were taken out
as funds continued to flow back to the Eurozone. However, against the dollar, the Euro struggled
to extend recent gains. Fourthly while the yen's downtrend continued last week, it has
lost some momentum ahead of this week's Bank of Japan meeting. Fifthly, the Sterling was
the second weakest currency, just slightly better off than the swiss franc and closed
lower against the yen.
Looking ahead, japanese yen's weakness is still expected but there could be some notable
rebound if the bank of japan disappoints markets this week. By disappointing, we mean the bank
not delivering what had been priced in, that is a modest expansion of stimulus and doubling
of the inflation target to 2%. European majors are mixed as the sterling was rather weak
while the Euro has been resilient. A short term top looks formed in Euro Swissy already
and we'd probably see some sideway trading this week. Euro Sterling though, has accelerated
it's recent rally. However, note that Sterling Dollar will face near term support at 1.5827
this week and we might see a rebound. Meanwhile, news on the debt ceiling would likely give
the dollar an extended boost in the early part of the week. While the Canadian dollar
was relatively weaker, the Aussie could catch up any time should the dollar continue to
pick up strength. Overall, we think it's a bit risky to add to yen shorts in the early
part of the week. Even though the Euro could be softer against the dollar, we'd tend not
to short them. Our preference would be on long U-S Dollar Canadian Dollar and to a lesser
extend short Aussie Dollar U-S Dollar this week. And another choice would be going long
Euro Sterling.
In the U-S it's reported that after a close door negotiation, House Republicans agreed
to raise the so called debt ceiling for three months. The deal was under a condition that
both House and Senate will pass a budget within the the time to clear the way for long-term
deficit reduction negotiations. Nonetheless, that's a move that would significantly reduce
the threat of a U-S government default in the coming weeks. The Fed's Beige Book covering
the period from November 14th to January 4th indicated that economic activity in all 12
districts showed 'either modest or modest' expansion. The tone of this report was more
positive than previous ones. More importantly, it suggested that recovery in the housing
market is underway and this would in turns lift the prospect of other sectors in the
economy.
News out of Europe was mixed: a Successful Spanish bond auction addes further confidence
to stability in the Eurozone. And such confidence is a main driver in the reverse safe haven
flow from the Swiss Franc back to the Euro, which was clearly reflected in recent strength
in Euro Swissy, as well as Euro Sterling. However, the Euro hit some resistance towards
the end of the week as the I-M-F said that Greece: the center of the Eurozone debt crisis,
would face a financing gap of 5.5 to 9.5 billion euros for 2015 and 2016. Also, there were
concerns ove the Eurozone's economy itself, in particular after Germany reported overall
annual growth was pushed further down to a mere point 7%, compared to 3% in 2011 and
4.2% in 2010. The European Central Bank said in it's monthly bulletin that "more recently
several conjunctural indicators have broadly stabilized, albeit at low levels, and financial
market confidence has improved significantly." And, "later in 2013 a gradual recovery should
start." It also noted that the "accommodative monetary policy stance, together with significantly
improved financial market confidence and reduced fragmentation, should work its way through
to the economy, and global demand should strengthen." Also the E-C-B urged: “further structural
reforms should be rapidly implemented to make the euro area a more flexible, dynamic and
competitive economy."
Taking about Euro Swissy, it should be noted that the current weakness in the Swiss Franc
might prompt the Swiss National Bank to reverse some of it's Euro purchases for protecting
the 1.2 floor to lock in profits. Or at least, they might make use of the opportunity to
diversify its reserves. We don't expect that to reverse the Euro Swissy near term up trend.
But if that happens, the upside momentum might be dampened a bit and there could even be
some brief retreat.
In the U-K, Bank of England governor King said to a parliament committee that "it is
at a point where the economy is operating well below full capacity, the banking system
is in a stretched position and we are clearly struggling to find instruments to ensure an
economic recovery." King also noted that "the main problem of the euro crisis is the ability
to find a way of financing current account and trade deficits". And, the so called banking
union could just enable "countries which have banking systems that need to be recapitalized
to have that recapitalization financed by other members of the euro area". Meanwhile,
King also said while the E-C-B calmed markets, it can't "resolve the underlying real challenges
of either moving to a transfer union or finding a way to take sufficiently effective measures
to change the competitiveness of the member countries of the euro area" and a banking
union isn't the answer neither. A prepared speech by Prime Minister Cameron raised the
"danger" that the E-U will fail and the U-K would "drift towards the exit". Cameron intended
to set out a "positive" vision for the E-U's future where the -UK would play a "committed
and active part". But he also warned that the E-U were undergoing "fundamental change"
and there is " a lack of democratic accountability and consent" that is "felt particularly acutely
in Britain."
The Bank of Japan meeting will be the major focus this week. There were a lot of official
comments about the Japanese yen last week. But what matters most is what the bank will
actually do. Markets are expecting additional stimulus and a doubling of the inflation target
to Abe's 2% level. Also, the government and Bank will issue a joint statement after the
meeting. It should be noted again that markets should have priced in these expectations already.
And, the bank would need to do something strong to impress the markets for giving additional
fuel for a rally in yen crosses. That means moves like open-ended asset purchases or removal
of the point 1% deposit rate. Otherwise, we might see a pull back in yen crosses after
the news this week.
Aussie dollar was weighed down by weaker than expected job data. The job market contracted
by 5,500 in December compared to expectations of 4,500 growth. The data series has been
rather volatile with a pattern to oscillate from month to month between upbeat and downbeat.
But even though November's upbeat data was revised further up from 13,900 to 17,100,
the two month combined total was disappointing due to December's contract. The Unemployment
rate also rose to 5.4% as expected. Recently released forward-looking Australia and New
Zealand job advertisements dropped for a tenth straight month in December, raising the concern
that job markets will remain weak down under. And, unemployment could actually surpass the
Reserve Bank of Australia's projection of around 5.5% by mid year and prompt further
rate cut from the central bank.
Chinese Q4 G-D-P rose 7.9% quarter on quarter versus expectation of 7.8% quarter on quarter.
Also, that's an improvement over Q3's 7.4% and was the first pickup in two years. The
data is seen as a sign of strength that would carry on into Q1 and Q2 this year.
The World Bank sharply lowered its 2013 global growth forecast to 2.4%, compared to prior
projections of 3%. That's just a slight improvement from 2.4% in 2012. The World bank noted that
a global recovery is expected to be "closer to the end of the first quarter and into the
second quarter of 2013, rather than beginning a little earlier." It warned that the "global
economic environment remains fragile and prone to further disappointment" even though risks
are less skewed to the downside now. And, it noted that policy uncertainty in US has
already dampened growth and warned that Should policymakers fail to agree such measures,
a loss of confidence in the currency and an overall increase in market tensions could
reduce U-S and global growth by 2.3 and 1.4 percent respectively."
For advanced economies, growth is expected to be very weak at 1.3% in 2013 as weighed
down by austerity, high unemployment and sentiments. That's a sharp downward revision from June's
forecast of 1.9%. Growth is then expected to recover slightly to 2% in 2014 and 2.3%
in 2015. The U-S is expected to grow 1.9% in 2013, the4 Eurozone to contract point 1%
and Japan to grow by 1.5%. For developing countries, growth is expected to be the slowest
in a decade at 5.5% in 2013, also revised down from June's projection of 5.9%. Growth
is then expected to pick up to 5.7% in 2014 and 5.8% in 2015. China's growth is expected
to rise to 8.4% in 2013 then slow to 7.9% by 2015.