EUR: Backs Off 7 Month High
AUD: Pares Gains Ahead of RBA Minutes
CAD: Shrugs Off Weaker Housing Data
NZD: Consumer Confidences Highest in 5 Quarters
JPY: Japanese Names Hedging into the Rally
This is a very busy week for the British pound but the only piece of economic data released from the U.K. over the past 24 hours was Rightmove House Prices. According to the report, house prices dropped for the second month in a row by the largest amount since January 2002. Despite the government’s funding for lending scheme, the housing market is struggling. This week the Bank of England will release the minutes from their most recent monetary policy meeting and their bias should have a significant impact on the British pound. If a number of members support more easing, the GBP/USD could give up its gains. However for many members of the monetary policy committee, inflation is a big concern. Their fear is that the abundance of liquidity will drive up inflationary pressures. Consumer and producer prices are due for release today and BK Asset management expect some of these concerns to be alleviated by softer price pressures.
Having hit a 7-month high against the U.S. dollar at the start of the Asian trading session, the euro ended the day unchanged against the greenback. Eurozone trade was the only piece of data from Europe this morning and even though the region’s trade surplus rose from EUR9.5 billion to EUR10.2 billion, the increase fell short of expectations and the trade numbers drove the EUR/USD to the day’s low. Comments from European officials had very little impact on the currency. ECB President Draghi admitted that LTRO money struggled to reach the economy and his view that there is no inflationary impact from the expansion of the monetary base implies that the central bank retains a dovish bias. More difficult times could be ahead for France as President Hollande warned of more spending cuts in coming years. The Bundesbank of Germany expects a “noticeable” contraction in German GDP growth this quarter but expects the weak phase to be over soon. Overall, it seems that policymakers are still worried about the Eurozone’s economic outlook but the EUR/USD continues to hold steady thanks to the rally in equities and the Federal Reserve’s balance sheet expansion. Progress continues to be made in Europe with Greece receiving its long waited aid payment this morning. No major Eurozone economic reports are due for release on Tuesday, leaving the EUR/USD vulnerable to risk appetite.
In the final week before the Christmas holiday, the focus will be on the Fiscal Cliff. Based on the price action in the financial markets, equity traders are optimistic that there will be a deal by the end of the year but currency and bond traders are more skeptical. The U.S. dollar ended the day slightly higher against all of the major currencies with the exception of the British pound. President Obama and House Speaker Boehner met for 45 minutes today – their third conversation in the past 5 days – and while no announcements or hints of progress were made, the fact that they are talking often gave some investors hope that there will be an announcement by the end of the year. Republicans put forward a new deal that would extend tax cuts to households earning $1 million or less but the President rejected this offer quickly.
As the December 31st deadline approaches, currency and bond investors are growing weary of being overly exposed to a major risk and this concern has led to an intraday reversal in many of the major currencies like the EUR/USD, USD/JPY and NZD/USD. If we don’t receive daily updates on the Fiscal Cliff talks and more investors grow worried about the lack of progress, we could see further losses in all of the major currencies as investors take profit or hedge their positions before next week’s holidays. The latest U.S. economic reports left a lot to be desired. Manufacturing activity in the NY region contracted more aggressively in the month of December while demand for U.S. dollars dropped by -$56.7 billion according to the Treasury International Capital flow report.
The surge in USD/JPY on the Japanese election result was a little surprising given that the LDP win had been well flagged, but the fact that Abe is keeping the pressure up on the BoJ is still being seen as JPY negative. However, with or without more BoJ action, an extra fiscal stimulus package could turn out to be JPY positive if it boosts growth and asset prices in Japan, so we remain wary of assuming JPY weakness extends far from here.
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