- USD lost ground against G10 and EM currencies in Asian session, Thai Baht and Taiwanese dollar biggest winners against greenback, yet should be short-lived with tomorrow’s Fed rate decision
- Equities are still under pressure as markets keep pushing crude prices lower; however the sell-off is more confined than in the previous day.
- Reserve Bank of Australia reaffirms its bias toward low interest rate, arguing that a weaker Aussie would both support the economy and help to move inflation levels within the 2%-3% target band
- November’s final CPI due today should come roughly in line with first estimates. Core CPI is anticipated to print at 0.2%m/m or 2%y/y while headline gauge should come in at 0.0%m/m or 0.4%y/y. Release of the inflation report should have a limited impact on USD crosses, except to the extent of a significantly bad reading, with markets focused on tomorrow’s interest rate decision.
- German economic conditions are set to increase with ZEW index likely to print higher at 15 vs 10.4 in November
- We remain bearish on the EURUSD and we target the pair to head back below 1.1000
The USD paired losses during the Asian session and lost ground against G10 and emerging currencies. The emerging Asia markets extended gains verse the greenback, with the Thai Baht and Taiwanese dollar the biggest winners, yet the sell-off should start curbing with the Fed rate decision due tomorrow. Equities are still under pressure as markets keep pushing crude prices lower; however the sell-off is more confined than the previous day. West Texas Intermediate crude held ground above the $36 threshold, while its counterpart from the North Sea stabilised slightly below $38. On the equity side, Japanese and Australian shares paired losses with the Nikkei, Topix and S&P/ASX down 1.68%, 1.66% and 0.39% respectively. On the bright side, the Hang Seng, S&P/NZX, Kospi, Taiex and Bangkok SET are blinking green on the screen with a respective performance of 0.07%, 0.09%, 0.27%, 0.41% and 1.51%. Mainland Chinese shares sent a mixed signal after the PBoC devaluated the yuan for a seventh straight day, setting the USD/CNY mid-rate at 6.4559 on Tuesday; the highest level since July 2011.
In Australia, the release of the minutes did not provide any new information. The Reserve Bank of Australia reaffirmed its bias toward a low interest rate, arguing that a weaker Aussie would both support the economy and help to move inflation levels to within the 2%-3% target band. AUD/USD did not react to the headlines and continues to trade range bound within 0.7160-0.7385.
The final reading of November’s CPI should come in today roughly in line with first estimates. Core CPI is anticipated to print at 0.2%m/m or 2%y/y, while the headline gauge should came in at 0.0%m/m or 0.4%y/y. However the release of the inflation report should have a limited impact on USD crosses, except to the extent of a significantly bad reading, with markets focused on tomorrow's interest rate decision. EUR/USD continues to push higher and is currently testing the 1.1050 resistance for the fourth time in less than a week as traders are pricing in a dovish hike.
In Europe, equity futures are pointing to a higher open. The Footsie is up +0.77%, the DAX +1.03%, the SMI +0.75% and the CAC +1.06%. The pound sterling is treading water around 1.5150 ahead of November inflation report. Headline CPI is expected at 0.1%y/y, while the month-over-month reading should soften -0.1% as the collapse of crude oil prices weighs. GBP/USD is currently trading at 1.5143 and is biased to the upside due to the broad-based dollar weakness.
***Yann Quelenn, Market Analyst: German economic conditions are set to increase. The ZEW index, economic sentiment indicator, is likely to reveal the truth behind this statement today with data expected to print higher at 15 vs. 10.4 in November. Earlier this week, November final inflation data was released having slightly increased by 0.1% m/m. However, these are two sides of the same coin. The decline in energy prices still weighs heavily on the German economy with exports and industrial production bearing the brunt. Yet, last week’s GDP showed that consumption is the current key driver of the economy. Unemployment data is better and German retail sales have increased backed by more disposable income. The fundamentals remain positive, with Germany being able to run a budget surplus for the past three years. Germany remains the most competitive European economy. From our point of view, it is clearly the only European country capable of controlling its debt-to-GDP ratio, which remains below 80%. Other European countries continue to struggle with the inability to debase the currency and see their debt grow. We remain bearish on the EURUSD and we target the pair to head back below 1.1000.”***
Today traders will be watching CPI, RPI and PPI from the UK; ZEW survey from Germany; manufacturing sales and existing home sales from Canada; empire manufacturing, CPI and NHAB housing market index from the US; industrial production from Russia.