- EUR/USD: We maintain our bearish bias as the odds of an ECB easing move grow day by day.
- While we are not sure that Germany’s patience for massive QEs will last forever, as there is not enough momentum to create growth, we are sure that ECB stimulus is the only way to artificially maintain the illusion of recovery.
- RBA seems to be relatively satisfied with the Aussie’s current levels and inflation, which is close to target, but they have nevertheless left the door open for easing.
- EUR/CHF continues its bull run, successfully validating a break of the previous high (1.1050 from September 11th),
Americans preferred to increase saving in December as personal income rose more than expected (0.3%m/m verse 0.2% consensus), while personal spending stayed flat (0.1%m/m median forecast), confirming the poor retail sales figures released in January (Contraction of -0.1%m/m and -0.2% ex-auto). Are Americans battening down the hatches in anticipation for the worst, or are they just more cautious as a result of the last financial crisis? The Federal Reserve’s preferred measure of inflation, the PCE deflator, contracted 0.1%m/m in December, while the core gauge, which excludes the more volatile and seasonal food and energy prices, also missed forecast and came in flat versus +0.1%m/m median forecast. Finally, the US manufacturing sector shrank for a fourth straight month in January as foreign demand remained desperately lacklustre, while the strong US continued to damage the outlook. The ISM gauge reached 48.2 in January, while the previous month’s reading was downwardly revised to 48.0. However, the slight uptick in new orders - 51.5 versus 48.8 in December and production (50.2 vs. 49.9) may signal a stabilisation of the sector even though employment slid to 45.9 from 48.0 in December. Overall, the market was broadly expecting this poor data as most USD crosses remained stable. EUR/USD is still trading within its medium-term range, between 1.0711 and 1.1060, currently trading at around 1.09. We maintain our bearish bias as the odds of an easing move from the ECB grow day by day.
***Yann Quelenn, market analyst: “Eurozone unemployment is set to remain unchanged. December's unemployment figures will be released today and the market expects them to print unchanged at 10.5% - the lowest rate in a little more than four years. Yet, significant disparities remain amongst European countries. For example both Spanish and Greek jobless rates both top 20%, while Germany on the other hand looks much healthier with an unemployment rate of only 4.55 in November. We remain quite concerned about the mid-term future of the Eurozone. While we know that Draghi will do “whatever it takes” to drive up inflation towards the 2% target we should consider that Germany’s patience for massive QEs may eventually run out, if they feel that they are the ones footing the bill. However, the unemployment rate is far too high to enable a push up in inflation. As a result, there is simply not enough momentum to create growth and so, from our standpoint ECB stimulus is the only way to artificially maintain the illusion of recovery. Yet, in the United States, one dollar of revenue costs more than 3 dollars of debt. So there are still some room for the ECB to manoeuvre. The key issue will be whether the central bank will be able to increase inflation in the long run. We remain dubious judging from this approach’s track record in U.S. and Japan and with the poor results we are seeing in both cases. We are particularly sceptical when we see Japan, which is in all-in mode, has also now adopted negative rates (amidst massive QEs) for some deposits from commercial banks.”***
The Reserve Bank of Australia left its cash rate target unchanged at 2.00%, in line with market expectations, but emphasised that the low inflation environment may justify further easing. In our view, the RBA seems relatively satisfied with the current levels of the Aussie as well as inflation, which is close to target, but has decided nevertheless to leave the door open for easing - just in case. Just like all the other commodity currencies, AUD/USD traded lower during the Asian session as crude oil weighed. The Aussie lost 0.51% against the greenback as it stumbled against the resistance implied by its 50dma, which currently lies at $0.7144, for the second time in three days. The loonie also felt the effects of crude oil as USD/CAD jumped 0.75% from yesterday low to 1.40; the bias remains positive.
In the equity market, Asian equities felt the heat overnight as worries about global growth and weak, falling oil prices came back under the spotlight. In Japan, the Nikkei slid 0.64%, while the broader Topix index fell 0.73%. In Australia, the S&P/ASX was down 1%, while in New Zealand the NZX edged up 0.09%. Mainland Chinese stocks were trading significantly higher, erasing yesterday's losses, with the Shanghai and Shenzhen Composite up 2.26% and 3.42% respectively.
EUR/CHF continues its bull run, successfully validating a break of the previous high (1.1050 from September 11th). In the event of disappointing retail sales (due at 8h15 this morning), the pair should continue to chase higher ground.
Today traders will be watching unemployment from Spain, Germany, the euro zone and New Zealand; industrial production from Brazil; Markit/CIPS UK construction PMI; Swiss retail sales