USD
Concerns that the emerging market turmoil of the last few day’s might persuade the Fed to stop its tapering had weighed on the dollar, however, news on Monday that urgent measures were being taken to restore confidence, including emergency meetings by the central banks of Turkey and Argentina on Wednesday, led to a recovery in risk appetite, which helped support the dollar and kept the possibility of a taper at this week’s FOMC alive. Whether that goes ahead now very much depends on how U.S data holds up this week, as well as whether volatility in emerging markets calms down. Given the poor December Payroll’s figure there now seems to be growing evidence the Fed may take a breather at the January meeting, which would spell a weaker dollar. Today’s data failed to instil more confidence after it showed a below -expectations result in New Home Sales of 414k when a 10k rise to 455k had been expected; that equated to 7.0% fall m/m versus the -1.9% expected.
EUR
The euro fell marginally on Monday after ECB President Mario Draghi hinted at possible plans to combat deflation using a new form of market operation, which would involve the ECB buying securitized debt from euro-zone banks, to help drive lending in the periphery, and increase liquidity. Essentially this would involve the ECB in buying loans made by banks to individuals and businesses. The comments were made by Draghi whilst speaking on a panel at Davos, in response to questions about whether the ECB would use QE. On the data front, figures showed a rise in business sentiment in January, via the German IFO survey. All the components rose either in line with or above expectations. IFO Business Climate rose to 110.6 vs 110.0; ‘Current Assessment’ rose to 112.4 in line with expectations, and ‘Expectations’ increased to 108.9 from from 108.0 forecast.
GBP
The pound rose against most counterparts on Monday as strong fundamentals continued to underpin the currency with deep support. Sterling also rose despite expectations – which are now considerably firmer – that the BOE will change its forward guidance criteria because unemployment has come down so quickly recently, and fails, according to ECB officials, to adequately reflect the state of the economy. This is likely to continue to delay a hike. Through a series of comments made at the economic summit at Davos, the BOE’s governor, Mark Carney, has suggested that the BOE will be changing the indicators it looks at to assess the economy. One possibility is to measure average wages; another the number of part-time workers wishing to be employed full-time and also the number of long-term unemployed getting into work. Another possible guidance option would be to use MPC member inflation forecasts for 2-3 years ahead. Finally, there is the possibility of actually giving a firm date in the future of when policy would be reviewed as guidance.
JPY
The yen weakened on Monday after risk appetite recovered following reports that central banks in emerging markets were taking emergency measures to try to stem the crisis caused after last week’s emerging market chaos. The Japanese currency had appreciated on Friday when markets were haemorrhaging but panic eased on Monday. News from China that a large 500m investment trust ICBC was prevented from going belly-up by a last-minute bail out, also helped risk appetite. However, this is likely to be only the first of many cases involving Chinese ‘shadow-banks’ which are seeing more of their creditors default after the recent economic slow-down. The 1.2tr industry supplied much of the capital for large infrastructure projects, however, this may come to and end, hitting the Chinese economy, and by default the rest of the globe in the months to come.