Sterling remained soft last week even though the MPC left rates unchanged at the Thursday meeting, perhaps in part because of government indications that monetary policy would retain the responsibility for stimulating growth as fiscal policy would remain targeted on deficit reduction. Even so, the chances of further easing under King have to be lower now.
Despite the comments from the Estonian CB deputy governor Kaasik on Friday indicating more than one vote for ECB easing at the last meeting, we see little reason to get aggressively EUR bearish here. The risk positive market tone is supporting peripheral bond markets, and forward points are moving modestly in favour of the EUR as EUR/USD cross currency basis has declined in the “risk on” environment, underlining that it remains hard to be EUR negative in a risk positive environment. There should still be good support in the low 1.29s, and Lloyds TSB would favour the EUR upside from here in the absence of bad political or economic news from the Eurozone.
The calendar is light today, apart from several notable releases from euro area countries, including the German trade balance and French industrial production for January. Given the larger than expected decline in euro area Q4 GDP, and last week’s downward revisions to ECB staff forecasts for euro area growth in 2013 and 2014, markets will be looking to these data for a steer on how trends will evolve in Q1.
Tomorrow sees this week’s main UK releases, covering industrial production, manufacturing output and trade. These will offer insights into the much anticipated rebalancing of the UK economy. Industrial production fell by 1.8% in Q4 and further safety-related issues in North Sea oil output, as well as an expected 0.3% m/m decline in manufacturing output, should see industrial production contract by 0.9% m/m in January. Although the recent decline in sterling should boost net trade, time lags mean that any impact is unlikely to be seen in the January data.
On Friday, NFP reports was unequivocally positive news for the US economy and the greenback which rallied against almost every other major. The EUR/USD dropped through the 1.3000 level in the aftermath of the release but once again held the key 1.2950 support. Although the euro has long ago stopped trading on risk flows, the fact that it has not collapsed completely may be due speculation that strong US growth could revive export demand in the EZ and thus act a locomotive for global growth.
Although the EUR/USD remains weak, it continues to consolidate around the 1.3000 level. However in order for the unit to mount any credible counter trend rally the market will need to see some improvement in EZ economic data relatively soon. Friday’s miss in German Industrial Production makes that task all the more challenging.
The one currency that did not fall against the greenback was the loonie (Canadian Dollar) which gained ground across the board after much better than expected Canadian employment data. Canada saw a massive explosion in jobs generating 50.7K versus 8K expected. Canada gained 33.6K full time jobs and created another 17.2k part time jobs. The rise was the largest monthly gain since December of last year and puts aside most concerns regarding the decoupling of growth on the North American continent.
The Canadian dollar has been under strong selling pressure for the past month, but despite the broad market bearishness USD/CAD could not clear the 1.0350 level and given Friday’s upside surprise that level should be a near term top for the time being. Although the BOC remains relatively dovish, Friday’s stellar employment serves as the first positive major economic surprise in weeks and if it signals a pick up in activity than the loonie should strengthen over the next several weeks with USDCAD trading down to 1.0150.
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