Forex moves have been rather uninspiring, unless you are Cable of course, as investors wait to see if they are served up any clues on how many Fed members are in favor of ending QE early. The prospect of a QE exit is likely to limit further dollar losses. So far this morning, investors are clinging to yesterday’s strong improvements in the German ZEW and likely strength in the upcoming IFO and PMIs to justify holding the single currency at the moment. Perhaps one of the stronger arguments supporting the 17-member currency would be the reallocation of funds by Japanese investors. Just like any global investor, Japanese citizens, too, are trying to maximize their returns.
Outgoing Governor of the BoE Mervyn King, along with two fellow members, were defeated in a push for extra stimulus at this month's MPC meeting according to their minutes published this morning. All three voted to increase the QE package by +GBP25m to +GBP400m, stating that further AP would help the U.K. economy without influencing inflation. However, their six other policy cohorts happened to defeat them. This committee split highlights the dilemma facing rate setters in the U.K. and heightens investors' conviction to sell GBP as the possibility of more BoE QE becomes likely. This month marks the fourth time in 10 years that Governor King finds himself in the minority camp. Soon it will be Governor Carney’s issue.
Not all U.K. data is providing the market with a “gloom and doom scenario.” The number of U.K. citizens in work rose to a fresh record high this morning for Q4 last year (+154k to +29.7m), while the number of people claiming unemployment benefit fell last month (-12.5k to +1.54m). However, when measured by the international comparable measure of unemployment, the headline tells a different story. The number of U.K. unemployed increased by +10k citizens to +2.5m in the three months to December 2012 or +7.8% from +7.7%. This is another reason to add to the list of compelling reasons why Cable has fallen a cent and a quarter to an eight-month low this morning.
These lackluster markets have been doing very little, but they have said a lot. Is the Canadian economic miracle over? The loonie, the interest sensitive and commodity swaying currency, has caught the negative bug, making a few loonie enemies happy on the way.
With yesterday’s Canadian wholesale trade data (-0.9%) well under expectation and last week’s manufacturing sales declining (-3.1%), by the biggest amount in nine-months, then there is little that this Friday’s Canadian retail sales is expected to produce to offset contraction anticipated to grip the Canadian economy in Q4 2012. If the markets were to throw construction and housing data into the mix then Carney’s departing Q1 expectations for 2013 could be considered a tad too rich (+2.3%). If true and consistent, then this week’s loonie flight is very much overstated. The longer the CAD trades north of 1.01 then stronger is the possibility that 1.0250 becomes vulnerable near term.
A strengthening yen is buying Japan some breathing space. Despite the G20 giving the Japanese PM and Abenomics somewhat of a fumbled pass at the weekend, PM Abe’s deflation theories are still alive. However, any blatant attempts at currency manipulation to achieve the BoJ’s new +2% inflation target are very much off the table. Japan, it seems, will never be in a position to buy foreign bonds directly according to a bulling and apprehensive G20. Innuendo foreign threats remain “silent, loud and firm” all at the same time.
Like a true politician, PM Abe’s hurry up and wait policy is beginning to become more evident. The new Prime Minister has put off naming the new BoJ Governor and deputies until after his U.S. visit later this month. To date, Muto remains the top dog by choice. However, do not be surprised to see more internal question on how aggressive the BoJ policy can become.
While the currency asset class is taking a time out, investors continue to pile into euro-equities now that the worst of the euro crisis seems to be over. Foreign inflows are being matched by the net-outflow from eurozone residents. This flight of internal capital from the region is at a 9-month high (-EUR39.5b). What do the local’s know that foreign investors are failing to grasp? If anything, the eurozone's investors are more concerned by their homelands' weak growth prospects, while the individuals from away seem ignorantly “blissful” at this moment. If the locals’ train of thought wins this round, then the single currency is again in trouble.
More proof in the EUR support camp came from commercial banks in the eurozone borrowing nothing at this week’s ECB’s weekly U.S. dollar operation for the first time in 18-months. This is further evidence of easing stress on the financial markets. In recent weeks, the volume of business has declined significantly. It was only late last summer that the weekly operation reached +$10b!
The “Battle of the Cyclical Economies Balance Sheets” is finding favor with the EUR. The eurozone financial institutions have prepaid another +EUR5b of three-year loans issued by the ECB two-years early. This broad measure of risk in the eurozone volume fell -0.4% compared with the previous week. The euro banks are being given a weekly opportunity to pay down this debt. The balance sheet remains +3.5% larger than it was a year ago. However, it’s all about perception, and the euro’s balance sheet is winning that compared to the Fed’s.
The main focus of the day will be on the January FOMC minutes (2PM EST), where the focus will be on the committee members’ expectations for QE3 and discussions about tapering purchases. There is nothing out of the ordinary seen in European trading that will influence traders away from their assumptions that the EUR range has merely shifted to the right ever so slightly.