Greenback Recovers, but Antipodeans Advance

  • There are two broad themes among the major currencies today; the first is the pullback in the euro and yen after yesterday’s run-up
  • The second broad theme is the relative strength of the Australian and New Zealand dollars
  • The Swiss National Bank met, and as widely anticipated, left its 3-month LIBOR target unchanged at -75 bp
  • The Bank of England meets and will publish the minutes immediately
  • We note the conflicting signals from Sweden and Norway
  • ZAR remains under pressure after the announcement yesterday that South Africa’s Finance Minister Nene was replaced
  • Brazil’s Baa3 rating was put under Review for Downgrade by Moody’s; we think it’s a done deal
  • Bank of Korea met and kept rates steady at 1.5%, as expected; Peru’s central bank meets and is expected to hike rates 25 bp to 3.75%

Price action:  The dollar is mixed against the majors.  The Antipodeans and the Norwegian krone are outperforming, while the Swedish krona and the euro are underperforming.  The euro is trading back below $1.10 after being unable again to break above the 200-day MA (near $1.1030 today), while sterling is trading flat $1.5180 ahead of the BOE decision.  Dollar/yen is trading near 121.50.  EM currencies are mostly weaker.  RUB and TRY are outperforming, while RON, ZAR, and IDR are underperforming.  The rand remains under pressure after yesterday’s firing of Finance Minister Nene.  MSCI Asia Pacific was down 0.2% on the day, with the Nikkei down 1.3%.  MSCI EM is down for the seventh straight day at -0.5%, with the Shanghai Composite down 0.5% and the Shenzen Composite down 0.1%.  Euro Stoxx 600 is up 0.1% near midday, while US futures are pointing to a higher open.  The 10-year UST yield is flat at 2.22%, while European bond markets are mostly firmer.  Commodity prices are mostly higher, with oil mixed and copper up slightly. 

  • There are two broad themes among the major currencies today.  The first is the pullback in the euro and yen after yesterday’s run-up.  Position adjustments with the help of stop losses seemed to be the key consideration.  Both the euro and yen extended the recovery seen in the second half of last week.  Year-end considerations, both in terms of positioning and less liquidity, likely played a role as well.
  • The second broad theme is the relative strength of the Australian and New Zealand dollars.  The RBNZ got the ball rolling with a hawkish rate cut.  By that, we mean that although the RBNZ cut rates, its guidance reinforced the view that the 25 bp cut in the cash rate to 2.50% may be the last cut in the cycle.  The central bank indicated that at current rates, the inflation target can be reached.  To be sure the RBNZ called for further depreciation of the New Zealand dollar.  We suspect that, although the RBNZ is on hold for next few months, strength in the currency or continued weakness in commodities will likely put easing back into play later in Q1 or early Q2.
  • The New Zealand dollar staged a sharp rally on the news, and then extended the rally in Asia to a little past $0.6780.  The failure to rise through the $0.6800 area spurred some liquidation that pushed the Kiwi back to $0.6720.  Support is seen in the $0.6680-0.6700 area.
  • The Australian dollar was initially dragged higher by the Kiwi’s surge but then got its own impetus in the form of a jobs report that seems too good to be true.  The consensus had expected a 10k loss in jobs after a 58.6k increase in October.  Instead, +71.4k jobs were reported though the October increase was pared to 56.1k.  The unemployment rate ticked down to 5.8%, even though the participation rate rose to 65.3% from 65.0%.  Also, the breakdown showed a gain of 41.6k full-time positions after a revised 38.4k (initially 40k) increase in October.  Year-to-date, Australia has reported 301.7k new jobs, the best since 2006.
  • While there does seem to be some improvement, many suspect that methodological issues relating to the rotating sample may be distorting the data.  Several time series that economists look to for confirmation, like income tax receipts, are not matching the improvement.  However, retail and auto sales figures are robust, and home construction is at record highs.
  • The Aussie ran out of steam near $0.7335.  Initial support is seen in the $0.7250-0.7280 area.  Many suspect the RBA’s monetary easing cycle is over, though appreciation of the Aussie and weak commodity prices could see speculation of lower rates materialize in a couple of months.
  • The Swiss National Bank met, and as widely anticipated, left its 3-month LIBOR target unchanged at -75 bp.  It too expressed concern about the overvaluation of its currency and indicated that negative rates and continued intervention will help.  It did not change the inflation forecast for next year, which stands at -0.6%.  This year’s estimate was tweaked to -1.1% from -1.2%.  The Swiss franc is moving largely in line with the euro today as yesterday’s gains are unwound.  The franc has strengthened slightly on the cross.
  • The Bank of England meets and will publish the minutes immediately.  McCafferty has been the lone dissenter calling for a hike.  There are some thoughts that he could abandon this position.  This would not be the first time that McCafferty ran ahead of the pack only to rejoin the fold.  His hawkish dissent did not prevent the market from recognizing the more dovish signals from the BOE.  So if the dissent is abandoned, we would not expect it to have much impact.
  • Last week, the June 16 short-sterling futures contract tested the contract high set on October 2 at 99.34 (implying a 66 bp interest rate on a three-month deposit in six months’ time).  This is evidence of the recognition that McCafferty was off-message.  However, rates have firmed a bit, and the implied yield had risen to 72 bp currently.  Sterling itself has staged a rebound from the dip to about $1.4960 on Tuesday to almost $1.5200 today.  Intra-day technicals warn of risk of a break of $1.5150.
  • Sterling’s strength is more evident against the euro than the dollar.  The euro rallied from about GBP0.7000 at the start of the month to almost GBP0.7280 on Tuesday this week.  It is now testing the GBP0.7200 area.  A break could spur a move toward GBP0.7160 initially.
  • The euro peaked near $1.1040 in the North American session yesterday, extending last week’s advance.   A loss of momentum in Asia brought in selling in Europe.  Potential exists for a move to $1.0890-1.0920 today.  We had anticipated the $1.08-1.10 area to confine prices ahead of US retail sales due tomorrow.  At the start of the week, the $1.08 level was briefly frayed but appeared to bring in some bottom-pickers.  Similarly, the move above $1.10 also seemed premature.  It appears headed back to the middle of the range, though a light news stream in North America may deny it sufficient momentum to reach $1.09.
  • Lastly, we note the conflicting signals from Sweden and Norway.  Sweden’s November CPI disappointed by falling 0.2% on the month for a 0.1% year-over-year pace.  Underlying inflation, which uses fixed mortgage interest rates, slipped to 1.0% from 1.1%.  Although the Riksbank is not expected to ease rates further or expand is asset purchases next week, deflationary forces indicate that the central bank’s work may not be done.
  • Norway, on the other hand, reported stronger than expected inflation pressures.  Headline CPI rose 0.4% in November, lifting the year-over-year rate to 2.8%, which is the highest level in more than two years.  The underlying rate, adjusted for tax changes and excludes energy, rose 3.1% year-over-year.  The Norges Bank meets next week and is expected to stand pat.  Sweden’s central bank is concerned about (the lack of) price pressures, while Norway is more concerned about weak growth.
  • The stronger inflation report sparked more than a one percent drop in the euro against the krone.  However, the move needs to be placed in the context of the sharp euro gains over the past week.  The NOK9.41 area corresponds to a 38.2% retracement of those gains, and NOK9.35 is about the 50% objective.  The euro remains firm against the Swedish krona at the upper end of this week’s range.
  • ZAR remains under pressure after the announcement yesterday that South Africa’s Finance Minister Nene was replaced.  USD/ZAR spiked to a new all-time high near 15.40 Wednesday before falling back, but it remains bid today.  It’s worth noting that Nene has been undertaking fiscal tightening in an effort to hang on to investment grade ratings.  His removal suggests that there was a clash with President Zuma about how deep the fiscal cuts should be. Replacement David van Rooyen (lawmaker from the ANZ) is an unknown quantity, and the timing is simply awful.  We reiterate our long-standing call that the nation gets cut to sub-investment grade, and now it’s likely sooner rather than later.
  • Elsewhere, Brazil’s Baa3 rating was put under Review for Downgrade by Moody’s.  This is a stronger action than just moving to a negative outlook.  We think it’s a done deal, as our own sovereign ratings model has Brazil (as well as South Africa and Turkey, for that matter) at sub-investment grade.  We’re not sure how much is priced in by the markets regarding downgrades, but loss of investment grade (usually by at least two of the agencies) could lead to some forced selling.
  • Bank of Korea met and kept rates steady at 1.5%, as expected.  The last move was a 25 bp cut back in June.  CPI rose 1.0% in November, well below the 2.5-3.5% target range.  However, the bank for now seems to be letting fiscal policy and a weak won do the heavy lifting.  The BOK noted that it held rates steady in order to monitor Fed policy, but added that a Fed hike won’t lead to an immediate rate hike.  This seems to imply the next move would eventually be a hike, but we cannot rule out further easing in 2016 if the economy remains sluggish.
  • Peru’s central bank meets and is expected to hike rates 25 bp to 3.75%.  The last move was a 25 bp hike to 3.5% back in September.  The bank has signaled a cautious pace of tightening, but the 25 bp per quarter may have to be accelerated after CPI rose sharply to 4.2% y/y in November, furthest above the 1-3% target range for this cycle.