EUR: Capital Inflows Are Only Beginning
NZD: Trade Returns to Surplus
CAD: Moody’s Downgrades 6 Banks
AUD: Business Confidence on Tap
Slope of USD/JPY Rally Should Begin to Flatten
The British pound dropped to a 13 month low against the euro and 5 month low against the U.S. dollar yesterday. The pound continues to get pounded by traders who are dumping the currency left and right on the fear that the Bank of England could ease monetary policy again over the next few months. Economic data has been very weak and if not for the upside risk to inflation the Monetary Policy Committee would have increased asset purchases already. Yet even with the potential of inflation trickling higher again, the MPC may soon find themselves with no choice but to boost stimulus. Incoming Bank of England Governor Mark Carney is certainly not adverse to the idea. Speaking in Davos over the weekend, the current BoC Governor who is set to become the new head of the BoE in June said “monetary policy in developed economies isn’t maxed out and central banks should focus on achieving escape velocity for their economies.” These comments imply that he firmly believes there is room for additional stimulus even if it means that it “may take a little longer” to hit their inflation goals. With no U.K. economic reports, scheduled for release tomorrow, the downtrend in the GBP will remain intact.
Meanwhile the euro continued its rally against the comm dollars as AUD/USD slid below the 1.0400 figure while EUR/AUD rose to a fresh half year high of 1.2950. Part of the reason for the rally is the massive unwind of the Aussie “safe harbour” trade, as the risk of EZ fracture has now passed investors are repatriating funds back into euros on hopes of an economic recovery in the region. On the other hand, the Aussie is not longer the beneficiary of the risk trade as the currency’s correlation with global equities declined markedly. Although stock prices have performed well in January the Aussie has lagged badly as investors reassess the country’s prospects amidst lower capital expenditures on new mining projects and its still high exchange rates which weigh on Australia’s competitiveness. Recent data from Down Under has been disappointing and today’s LEI report may confirm a further slowdown in activity which pressure the unit lower towards the 1.0350 level as speculators continue to dump their long AUD/USD positions.
According to an analysis conducted by the Dutch Bank ING and reported by the Financial Times nearly 100 billion euros flowed back into the Eurozone in the fourth quarter, which is the equivalent to “about 9 per cent of the economic output of Spain, Italy, Portugal, Ireland and Greece.” “Net private inflows into the periphery countries totalled €93bn in the last four months of 2012, according to ING. In contrast, the first eight months had seen €406bn flow out of the five countries, equivalent to almost 20 per cent of gross domestic product in the periphery economies. In 2011, outflows from the periphery totalled €300bn.” This means that there’s still a lot of money parked outside of the Eurozone that could flow back into the country this year, fuelling further gains in the EUR/USD.
The U.S. dollar traded higher against all of the major currencies yesterday, but the consistent performance of the greenback does not mean that risk on / risk off will start to drive currency flows. The S&P 500 has been on fire since the beginning of the year and while the optimism in stocks translated into strength for some currencies, others failed to follow. This may be a very busy week for U.S. data but with no major surprises expected from the FOMC meeting, GDP or NFPs, the impact on risk appetite and currency flows could be limited. We have seen quite a bit of divergence in the performance of currencies since the year began and this was because country specific factors are driving currency flows. Even on a day like today where the dollar appreciated against all currencies, the EUR, CAD and CHF lost nearly nothing to the dollar while the GBP and NZD fell sharply. When there are no major systemic risks in the market, relative fundamentals start to matter again. This will change however if there is a new shock to the financial market or we get unambiguously strong or weak data from the U.S. or China that prompts investors to readjust their positioning.
The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.