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The Euro soared last week as expectation of a European Central Bank cut receded drastically
following Draghi's post meeting press conference. Strength of the common currency was impressive
considering that the sleeping Euro Swiss Franc also jumped over 100 pips and broke out from
recent range. The Swiss Franc was the second strongest currency last week with the Sterling
lagging behind other European majors on weak economic data. The Japanese yen extended its
recent selloff on expectations of further policy easing from the Bank of Japan this
week, as well as the fiscal stimulus package announcement from the government. Solid trade
data from China boosted market sentiments in general and sent global equities higher,
with the S&P 500 closing close to a newly made five year high. Commodity currencies
also gained against the dollar last week, taken higher by risk appetite, with the Aussie
outperforming others on its close ties with China.
Technically, the strength of the Euro should be noted. Euro U-S Dollar and Euro Japanese
Yen have extended their recent rally. Euro British Pound also resumed the recent rise
and has taken out a medium term fibonacci level, which suggests more upside is coming.
Euro Swiss Franc also broke through a near term resistance level at 1.2168. These are
signs of solid buying behind the common currency. A major question is whether the Euro could
outperform the Aussie and Loonie. Euro Australian Dollar and Euro Canadian Dollar showed strength
last week but are both bounded in recent range. Based on the relatively unclear outlook in
U-S Dollar Canadian Dollar and Australian Dollar U-S Dollar, we'd prefer the Euro against
them in the near term and favor an upside breakout in Euro Australian Dollar and Euro
Canadian Dollar. Nonetheless the Japanese yen will likely remain the weakest currency
for the while. The speed of the yen's selloff will very much depend on the outcome of this
week's Bank of Japan meeting.
In the U-S, the Bipartisan Policy Center said in a statement that the U-S government will
be unable to pay all of its bills as early as February 15th. And it warned that "we have
less time to solve this problem than many realize" and the treasury will "exhaust its
borrowing authority and no longer have sufficient funds to meet its obligations in full and
on time at some point between February 15th and March 1st". And it emphasized that it
will be difficult to get beyond March 1st. Also the policy group predicts that a debt
limit increase of 1.1 Trillion Dollars is needed to fund the government through to the
end of 2013. And another 1 Trillion is needed for 2014. While the fiscal cliff issue was
solved earlier this year, there are still much negotiation to be done between Democrats
and Republicans on spending cuts and the debt ceiling. Meanwhile, U-S president Obama nominated
White House Chief of Staff Jack Lew to replace Timothy Geithner as Treasury.
In the Eurozone, the European Central Bank left all its main interest rates unchanged
in January, in line with consensus expectations. Thus the refinancing rate remains at 0.75%
and the deposit rate remains at 0%. Most importantly, President Draghi stated that the decision
was made unanimously. Economic weakness is expected to persist into 2013. Same as in
December, the central bank expects to see gradual recovery "later" in 2013. Concerning
inflation, the statement reiterated that it "should remain contained ... with inflationary
expectations firmly anchored". Meanwhile, "risks to inflation over the medium-term are
seen as broadly balanced". The Euro was also lifted by a solid debt auction in Spain. Spain
held its first debt sale in 2013 and sold a total of 5.8 billion euros in 2015, 2018
and 2026 securities, exceeding its maximum target of 5 billion euros. The auction showed
solid demand at both the short end and the longer end with the yield lower than prior
auctions. And the result further affirmed the government's position in not seeking a
bailout in the near term. Spain plans to raise as much as 121.3 billion euros this year.
In Japan, prime minister Shinzo Abe unveiled a 10.3 Trillion Yen stimulus plan to boost
recovery and end deflation. The plan is expected to boost G-D-P by 2% and create 600,000 jobs.
Abe said that "we need to say good-bye to the shrinking economy and aim to achieve a
strong economy where innovation and new demand leads to more jobs and income." 3.8 Trillion
Yen will be spent for disaster prevention and reconstruction, 3.1 Trillion will be used
to stimulate private investments. The stimulus package is expected to be financed by a 13.1
Trillion extra budget to be approved next week. And Abe said the government would also
"aim to achieve a primary balance surplus". It's also reported that the Bank of Japan
would consider additional stimulus at its January 21st to 22nd meeting this week, and
might even double the inflation target from 1% to 2%. The Yen has been deeply sold off
since the new Prime Minister Shinzo Abe's push for a 2% target. And selling intensified
as the central bank expressed it's intent to review that price goal. Abe has also been
pushing for "bold" monetary easing to revitalize the Japanese economy and this has been priced
in by the market. While the trend in the yen is still bearish, it will take something really
strong from the bank of japan to impress the markets to accelerate the yen's selloff, like
open ended asset purchases, or eliminating the point 1% interest rate floor on deposits
held at the bank by commercial banks.
China's trade surplus jumped to 31.6 billion dollars in December compared to expectations
of 20.1 billion. Exports rose an impressive 14.1% compared to expectations of around a
5% increase. Imports also rose 6% compared to expectations of 3.5%. For the whole year,
trade surplus soared 48.1% to 231.1 billion dollars with exports up 7.9% to 2.05 Trillion
and imports up 4.3% to 1.82 Trillion. C-P-I rose more than expected to 2.5% year on year
in December, compared to the prior month's 2% year on year and expectation of 2.3%. Looking
at the details, food price jumped a strong 4.2% year on year, the highest since May.
Services price jumped 2.5%, the fastest since October 2011.