Global Currency Movement and other Economic News

For many investors, today marks the end of the year, but it is finishing on a favorable note. The mixture of the FOMC meeting and the SNB adoption of negative interest rates underscored the actual dollar and equity bullish divergence theme. 

It struck us that too many people were doing all kinds of mental and verbal gymnastics to account for what was a technical move. The correction, which came after a strong six-week trend move, lasted a week, December 9-16. The S&P 500 and also the Dow Jones Stoxx 600 possess both recouped around 70% of this downdraft.

The euro peaked near $1.2570 upon December 16 and has not really been able to resurface above $1.2300 for nearly 24-hours. The SNB’s move, effective the same day the ECB’s meeting, The month of january 22, is no coincidence. Just like the market is feeling more confident inside a rate hike by the Given near mid-2015, it is feeling well informed of a broader asset plan from the ECB. The euro is actually holding above the low focused on December 8 just below $1.2250. In the thinning holiday markets, techniques may be exaggerated, but now it appears asymmetrically so to the downside.

The dollar peaked against the yen on Dec 8 near JPY121.85. The violent correction ended in entrance of JPY115.50, a key technical retracement level of the dollar’s advance from both October 15 as well as October 31. The JPY119.Fifty high the dollar documented today corresponds to a 61.8% retracement of the dollar’s decline over the past 7 days. A move above there would advise a return to the highs and beyond.  

Ironically, today’s dollar increases against the yen come as BOJ Governor Kuroda appeared to express concern about the pace of the recent moves.  It was practically a forgone conclusion that the BOJ wouldn’t alter policy or break new ground at it’s last meeting of the year.  The actual Nikkei gapped higher yesterday and today.  The index closed on it’s high and now appears ready to test the December 8 high that is just above 18000. 

Sterling is uninspired.  It is caught between your strength of the dollar and also the weakness of the euro (as well as Swiss franc).  Since mid-November, sterling has been limited to a $1.56-$1.58 trading range.  There have been a handful of violations of the two-cent range, but it has mostly held.  The euro has been around a wider range.  Since September, it has been peaking in the GBP0.8000-50 area and bottoming in the GBP0.7800 area.  The divergence between the UK and dinar area will widen.  Nevertheless, political uncertainty, especially with the actual Scottish Nationals indicating they are prepared to cut a deal with Labour, may detract from sterling’s advantage.  Meanwhile, the FTSE recouped 61.8% of its weeklong decrease. 

Incorporating the latest census data to determine economic activity, China revised how big its economy upward at the end of last year.  The 3.4% increase is CNY58.8 trillion.  To put that into perspective, consider it roughly the size of the Singapore’s Gross domestic product.  This is the first step of the procedure.   The next step is to adopt the worldwide standards regarding methodology, that China has signaled it will early next year.  This will likely boost estimations of the size of China’s economy another 3-5%.  One consequence of such revisions is that it makes evaluations to GDP, such as debt/GDP or current account surplus/GDP marginally smaller.  We suspect there is little coverage implications in the changed optics. 

On the other hand, the PBOC has taken actions to ease the liquidity squeeze within the interbank market.  It has injected an unspecified amount of liquidity through the Pledged Supplementary Lending facility and contains fully rolled over the MLF funds (CNY 500 bln three month financial loans) that were maturing.  The flurry of year-end IPOs in China has started, and between yesterday as well as December 25, there are approximately dozen IPOs that are tying upward over CNY3 trillion (~$480 bln).  Getting beyond the IPOs, with no repos expiring next week, many anticipate the liquidity squeeze to help ease. The 7-day repo rate, which is a helpful metric of interbank liquidity, jumped 154 bp today (213 bp around the week) to almost 6.0%.  The actual PBOC preferred to keep it below 4%.  

The Shanghai Amalgamated rose 1.7%, led by telecoms and utilities.  This can be a new four-year high.  Since the PBOC surprised investors by cutting the actual benchmark rate on The fall of 21, the Shanghai Composite has rallied almost 25%.  Its correction survived two days (December 8-9), and has already been recovering since. 

Canada reports CPI as well as retail sales today.  The consensus expects a 0.2% decline in headline inflation and a 0.1% rise in the core rate.  The main bank expects price pressures to ease.  The surprise may be in retail sales.  The headline is expected to be 0.3% lower after a 0.8% rise in October.  There is scope for an upside surprise.  Excluding autos, retail sales are expected to increase slightly after a flat studying previously.   

The divergence theme weighs around the Canadian dollar, which continues to be treated like as petrol currency.  The US dollar has found good support this week near CAD1.1560.  The commodity intensive Greater toronto area Stock Composite has rallying highly in recent day, but has generally under-performed.  The highs for the year were at the begining of September.

The Santa Rally Underpins the Dollar is republished along with permission from Marc to Market