- In the FX market, investors have made clear their preferences for safe haven assets such as the Swiss franc and the Japanese yen, running away from the Aussie, the Loonie, the Kiwi and the Norwegian krone
- New Zealand's inflationary pressures have opened the door for another rate cut with the credibility of the RBNZ at stake. We therefore expect the Kiwi to keep moving lower, with $0.63 as the next target
- BoE Governor Carney expressed his concern for the UK as well as global growth and inflationary pressures. The cable fell sharply on the news and a bullish reversal can be ruled out for now as the bias remains firmly on the downside with the next key support area, which lies at around 1.35-1.40, now wide open
- Markets are lowering the likelihood that a Fed rate hike will happen in March to 24%. The overall environment, including the oil price collapse and China’s slowdown is likely to keep weighing on data
- We think that the greenback is likely to suffer today and that EURUSD 1.1000 represents a possible issue
Since the beginning of the year, investors have had to contend with high levels of volatility across asset classes. The 10-day historical volatility on the S&P500 reached 25% - the highest level since September last year - as global equity indices erased gains from yesterday. Over the last few weeks, equity markets have been on a rollercoaster ride; yesterday we were moving higher with equity markets and commodity currencies pairing gains but today it’s time to go south. Asian stocks fell sharply on Wednesday, erasing yesterday’s gains. The Japanese Nikkei broke another support as it moved below 16,592 (low from January 2015), down 3.71%. The Topix index fell 3.70%. In China, the Shanghai and Shenzhen Composite were both down -1.03%. Stocks in Hong Kong fell 3.55%. In Europe, futures are pointing to a lower open with the Footsie down -1.73%, the DAX down -2.38% and the Euro Stoxx 600 down 2.27%
In the FX market, investors have made clear their preferences for safe haven assets such as the Swiss franc and the Japanese yen, running away from the Aussie, the Loonie, the Kiwi and the Norwegian krone. AUD/USD has almost completely erased Tuesday’s gains and is back at around 0.6850 - below the strong support lying at 0.6896.
In New Zealand, inflation dropped massively in the fourth quarter. CPI fell -0.5% from the previous quarter (vs. -0.2% expected and 0.3% in 3Q). On a year-over-year basis, the gauge rose only +0.1%, missing estimates of +0.3% and a previous reading of 0.4%. In our opinion, inflationary pressures have opened the door for another rate cut as with the credibility of the RBNZ at stake. We therefore expect the Kiwi to keep moving lower, with $0.63 as the next target.
Mark Carney took the market by surprise on Tuesday by delivering a dovish speech. The BoE Governor expressed his concern for the UK and its global growth and inflationary pressures. He stated “recent developments suggest that the firming in inflationary pressures we had expected will take longer to materialise” and added that “now is not yet the time to raise interest rates”. As a result, rate hike expectations have shifted from mid-2016 to early 2017. The cable fell sharply amid the news, falling as low as 1.4130 before stabilising 30pips higher. A bullish reversal can be ruled out for now as the bias remains firmly on the downside. The road toward the next key support area, which lies at around 1.35-1.40, is now wide open.
Safe haven assets are taking advantage of the strengthening risk-off sentiment. USD/JPY fell to 116.20 earlier this morning. The Japanese yen soared 1.19% against the US dollar and 0.65% against the euro. The Swiss franc was up 0.29% against the greenback, while gold jumped 0.64%.
***Yann Quelenn, market analyst: “The Federal Reserve will be paying close attention to December’s inflation data which will be released this afternoon. Indeed, recent data is concerning - especially last week’s retail sales data, which fell 0.1% m/m in December and printed only up by 2.1 y/y in 2015, the weakest year since 2009. Winter this year cannot be blamed for such low retail sales as we were told last year. Warmer temperatures should normally have boosted sales.
As a result, markets are lowering the likelihood of a March Fed rate hike to 24%. The overall environment, including the oil price collapse and China’s slowdown is likely to keep weighing on the data. Today, the consensus is that CPI will rise to 0.8% y/y. In contrast we firmly believe that deflationary pressures are likely to increase, especially as we expect countries whose revenues depends largely on commodities will increase their production in an effort to maintain their GDP. This move will have a deflationary impact on the U.S economy. We think that the greenback is likely to suffer today on this release and that 1.1000 represents a possible issue.”***
Today traders will be watching the job report from the UK; ZEW survey from Switzerland; retail sales from South Africa; MBA mortgage applications, housing starts, housing permits and CPI report from the US; CPI from Russia; manufacturing sales and interest rate decision from the BoC; interest rate decision from the BCB.