The biggest fear this morning was not a rumor that China may ease their RRR or the imminent possibility of Cbank intervention in yen, nope, it was Deutche banks forex outage (it seems to have come with their profit outage)! The worlds largest currency player experienced a brief disconnect on ‘Autobahn’ forcing them to experience the old ways and provide voice broking for a full 10-minutes. This certainly highlight the importance of this institutions presence in the FX game or are investors that bored with the same recycled reasons for market movements this week? The closer we get to NFP market positioning will get more interesting.
There are reports now that the PSI deal is being held up by differences between Germany and the IMF. We can assume when the collective actions clauses are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement! For now, little news is keeping trading ranges intact.
The overnight rumor of a RRR cut from the PBoC is nothing new, and its something that the market will have to live with until its done. The prospect of a cut was raised ahead of the Lunar New Year, however, data since supported the prospect of monetary easing. Analysts now feel that a rate cut is unlikely for a few months, but manipulating the reserve ratios is a strong alternative. With global growth under immense pressure, a reserve move gives us a shiny ‘Red Knight.’ Perception is everything. However, in this risk on environment their gesture could becomes diluted.
On the other hand, the BoJ presence is much more pressing. Comments from Japanese officials overnight will unlikely halt the yen gains anytime soon. JPY is one of the most liquid currencies in the world and is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that its only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
This mornings decline in the Euro-zones December Producer Prices (-0.2%, m/m and up +4.3% on the year) will be welcome news for the ECB. Along with positive market sentiment is helping to push Euro periphery yields much lower and aid them in their refunding requirements. Spain this morning was the latest winning candidate, its yields are being pushed to a new yearly ‘floor.’ With risk, offers in the higher 1.31’s are expected to weigh on the EUR’s rebound and keep the market focused on support ahead of 1.31 directly.
Other Links:
Fed’s Near-Zero Interest Rate Policy a Failure?
As part of the Davos World Economic Forum, UK Prime minister, David Cameron is urging his EU counterparts to follow Britain’s example. In his words: “In Britain we had to be bold”.
In a message to his European counterparts, Mr Cameron argued his government’s efforts to tackle its deficit had “earned credibility and got (the UK) ahead of the markets”, and eurozone leaders should now take similarly decisive action.
The eurozone crisis was “weighing down business confidence and investment” across Europe, he said, and EU leaders had to “to show the leadership our people are demanding”.
“Tinkering here and there and hoping we’ll drift to a solution simply won’t cut it any more,” he said.
Weekend discussions between Greece and its private lenders did not result in agreement as many had anticipated. At the same time, it has not been able to derail global equities entirely. It seems that investors have shunned the safety of US treasuries for a fourth straight session on hopes that a ‘Hail Mary’ deal by the Greek government is imminent.
With the beginning of the Chinese New Year holiday affecting market liquidity, some market moves have been slightly overextended. The US yield curve has steepened +3bps with 2/30’s moving out to +289bps, as longer dated securities lead the fall. Prices have also been pushed lower temporarily by German comments on the possibility of running the ESM and EFSF programs parallel. US 10’s are now trading on top of its first resistance point of +2.06%. The 10/30’s spread traded at +189bps, the widest point in six-weeks.
In this morning’s session, treasuries temporarily found a bid ahead of this week’s FOMC meet starting tomorrow and concluding on Wednesday. Policy makers are to introduce “major transparency” as an innovation process with individual FOMC members providing projections of the Fed Funds rates and each to explain the quantitative factors behind the projections.
Also putting pressure on prices will be the US treasury department coming to market this week to sell a total of +$99b in notes (2’s, 5’s and 7’s). First up will be tomorrows +$35b two-years, another +$35b of five-years are set for Wednesday, and finally, +$29b seven-year notes will take place on Thursday. Dealers expect this weeks issue’s to receive ‘extra’ concession, as China, a non-starter, will be celebrating New Year and providing little support. Now its back to ticker watching ahead of a Euro press conference scheduled for 20:30 GMT.
The Nikkei closed at 8,765 down -1. The DAX index in Europe was at 6,432 up +32; the FTSE (UK) closed at 5,782 up +54. US indices remained in negative territory with the Dow currently trading at 12,686 down -34.
What ever happened to the Greek haircuts? Market perception saw it as a done deal, where further details were supposedly forthcoming over the past weekend. According to the IIF, negotiations are ongoing and elements of an unprecedented voluntary PSI are coming into place. However, reports suggest bondholders have drawn “a line in the sand” regarding their maximum offer. That cannot be a market surprise. It’s now unclear whether an outline deal would be ready for approval by the Euro-zone finance ministers meeting today. It was the original deadline set by the Greek finance minister. Whatever happens, Euro ministers will decide what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package later today.
Confused signals suggest range trading rather than a strong “directional environment” for the markets short term. It’s been a battle for both the techie’s and fundamentalists of late. With the EUR’s one directional play, the single currency has been capable of posting bullish reversal signals outright and against the JPY (two of the most crowded trades). However, declining volumes on rising prices should concern the bulls. It’s usually referred to as a bearish indicator.
For the ‘bigger picture’ individual, the overall EUR risks may not dampen the bullish enthusiasm of late. Even Greece’s failure to agree with the PSI may increase “headwinds” for the currency, wider market sentiment should remain somewhat supported by the possibility of an increased ESM bailout facility and growth signs in the US.
The currency is proving more resilient than many had expected. With the regular stops and offers in place ahead of the psychological and mid-term target of 1.3, the market again will be focusing on the meet in Brussels today. Already this morning, German comments on the possibility of running the ESM and EFSF parallel, is supporting the EUR. The strong German debt auction result is pushing the market to test this option barrier, offer laden 1.3 level.
US data is beginning to highlight the disconnect between the US and the Euro-zone. As FX traders hone their Fixed Income (FI) skills with the Euro sovereign debt issues, even they must sympathize with the frustration of the US bond bears. The benchmark 10-year Treasury yield has defied improving US data, and straddles the +2% yield for most of this year. It’s another crowded market trade that mirrors the frustrations of the ‘short’ single currency strategy. Euro-zone concern remains in the driver seat while US data for now, acts like “Robin” of the relationship. Yields for Treasuries or other ‘safe haven sovereign debt’ are not in danger of rallying any time soon until the Euro-zone stabilizes.
Below are some other highlights of the week:
AMERICAS
US: Martin Luther King Day on Monday was respected by the markets; it was also to be the lead for a quiet beginning of the week, or so we thought. Lack of liquidity led to thin markets, producing volatility that allowed dealers print a new yearly EUR/USD low.
CAD: New Motor vehicle sales fell-1% in November to +137.6k units, offsetting the October and September gains. Truck sales fell -1.3% to +80.4k units.
USD: January Empire State Index on manufacturing conditions in New York of 13.48 was stronger than the consensus of 11. It was a rise from 8.19 in December and a third straight improvement from a series of negatives.
CAD: The BoC, as expected, kept O/N rates on hold at +1%, reporting there is considerable monetary policy stimulus in Canada. Carney sees less slack in an economy that is now expected to return to full capacity by the 3Q in 2013. Inflation was seen as marginally firmer.
USD: US wholesale prices fell in December as food and energy costs declined significantly. PPI (manufactures and wholesales) declined a seasonally adjusted -0.1%. A slowdown of costs may give the Fed more wriggle room. Core-PPI increased by +0.3% (the largest increase in seven-months).
USD: November TIC report recorded a net rise of $59.8B. Foreign holdings saw a large rise from Japan $59.9b and a small decline from china -$1.5B.
USD: December Capacity Utilization increased +0.3pt at 78.1%.
CAD: BoC Monetary Report. There was a major shift in tone in the US outlook that sees US growth forecast improve to +2% in 2012 from +1.7% in the previous MPR. The other main take away is a downgraded Europe forecast with growth now to be in recession territory at -1% in 2012 from +0.2% in the previous report.
BRL: The Brazilian Central Bank (BCB) cut the Selic rate by -50bp to +10.50%. “A moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012″. BCB seems to be signposting further cut rates. Analysts are expecting another -100bsp by March.
CAD: Canadian Manufacturing shipments advanced at a faster pace in November than forecasted, up +2% to $49.1b. Robust gains were seen in the petroleum and coal industry.
USD: US December CPI ex-food and energy at +0.1% was unchanged.
USD: December Housing starts were weaker than expected with a -4.1% fall to +657k, while building permits at +679k were down a marginal -0.1%. Starts declines were due to a correction lower in multiples.
USD: Weekly initial claims plummeted -50k to +352k, while continuing sank to +3.4m. US data is beginning to highlight the discount between the US and the Euro-zone.
USD: The Philly Fed disappointed with a 7.3 print (10.3). However, there were pockets of strength, business conditions were up, and employment was moderately higher while new orders and prices paid dropped.
CAD: Consumer prices declined in December at the fastest in six-months. On a monthly basis, both the CPI and the core fell in the month, -0.6% and -0.5% respectively. For 2011, Canada’s average inflation rate hit +2.9% (the biggest increase in eight years, 2010 was +1.8%).
CAD: Wholesale trade recorded a surprise drop in November (-0.4% to +$48.4b). The market had been expecting a+0.5% gain.
USD: Existing home sales came in a little lower than expected. Sales rose +5% in December to annualized pace of + 4.61 m units. Housing inventory fell to a 6.2 months supply.
You can just feel it, the EUR bulls are beginning to turn the screws. An impressive 24-hours has been “put in” by the single currency, retreat never an option, advance very much on the cards. Now that the IMF is officially using the T-word, proposing to increase its resources for lending by ‘ONE TRILLION’ dollars is again giving the EUR some fuel this morning. Many have not been capable of getting their minds around a billion, now we have a trillion-what does that really look like?
The most crowded short trade on the books is in danger of squeezing many more weaker positions out on the top side, as investors begin to question if it makes sense to remain short at these levels. It seems that the EURs new tendency to “decouple from positive economic news is fading.” Perhaps these shorts have been underestimating the success that the three-year LTRO is having in depressing short term yields of sovereign governments. Tomorrow, France brings to market much longer dated securities and should give the investor a better indicator of whats to be expected in the fixed-income fold.
The EUR is on course to complete its second consecutive trading session strengthening outright and against the yen, as optimism that Greece is nearing a deal to write down some of its debt is again boosting demand for the region’s assets. Its been reported that Greece is close to agreeing to pay +32c per EUR of government debt. It may be a tad early to rejoice, but optimism that a deal is imminent and stronger US data is beginning to turn, ever so slightly, recent market negativity. However, the big picture has not changed, the EUR region is in a recession, with the debt laden weaker peripheries “that” weak and in danger of dragging the Euro-zone down a path of complete destruction.
The imminent danger seems to be the fly-by night, irresponsible actions of the credit rating agencies. The single currency failed to pare some of its gains amid reports that Fitch may cut Italy’s credit rating by two-levels by the end of January, adding to concern the region’s debt crisis has yet to be contained. Rating’s watch and rhetoric is power for the course. Thus far, European sovereign have been capable of issuing short term debt, the same can be said for the downgraded EFSF program. It’s the longer term issues that need to be auctioned to truly gauge market appetite. Tomorrow, France will be the first to oblige!
The Spanish Bond and Italian Bill auctions were well received this week and gave the single currency hope for at least 24-hours. However, this morning’s final Italian issues of the week have provided the market an ideal opportunity and excuse to sell the currency again. Dealers have been talking about the limited upside of the single currency and that the risk reward favors shorting the EUR. Analysts have been revising their first quarter and year end projections down to an average of 1.22 and 1.15 respectively. So far in 2012 the EUR has weakened against all G10 and major EM currencies. This weakening has been a function of ECB easing and stronger global data, which have boosted risk sensitive currencies across the board. Now we must ask ourselves, can this downward trend outright and on the crosses continue? The ECB’s easing policy has provided a massive liquidity injection (LTRO), lowered the cost of shorting the currency and encouraged the funding of risk trades using the EUR.
Below are some other highlights of the week:
EUROPE
EUR: Merkel and Sarkozy turned up the pressure on Greece and institutional creditors; warning that a loan backed by EU and IMF is on hold until Greece enacts budget reforms and concludes talks over reducing its debt load.
GER: sold +EUR3.9b t-bills at a negative yield (-0.122%) for the first time amid demand for the debt securities of Europe’s biggest economy as a haven from the sovereign debt crisis roiling the region. Investors are prepared to pay when lending in exchange for the assurance of getting their capital returned.
EUR: Mainland data continues to under perform. German November, IP was down -0.6%, m/m, below the -0.5% consensus following weak orders data last week.
CHF: Retail Sales rose +1.8%, y/y, in November, well above the consensus forecast for +0.2%. Including the stronger PMI print last week points to “a somewhat less negative growth affect from the stronger currency.” Lack of a deflationary shock will have policymakers keeping the 1.2 floor in place awhile longer yet.
CZK: Czech inflation fell slightly to +2.4%, y/y, from +2.5%, below the consensus for a stable reading. The market expects this to “tame the recently more concerned language from the central bank”.
FRF: French manufacturing production for November unexpectedly posed a +1.3%, m/m, gain. The October release was also revised higher, to +0.2% from flat. The BoF business sentiment indicator rose to 96 from 95-better data may suggest that the “fears of recession across the region are not materializing.”
Fitch rating agency has indicated that a French downgraded is unlikely this year.
EUR: Reports indicate that progress is being made towards a private sector participation agreement.
SEK: IP dropped -1.9%, m/m/ in November, much worse than the -0.8% expected. The annual growth rate stands at +0.2%, y/y, down from +4.5%. Digging deeper, orders were less encouraging, down -4.8% on the month following a -2.3% drop in October. The manufacturing intensive Swedish economy is becoming more affected by growth concerns in core Europe, making the SEK more vulnerable.
NOK: CPI surprised weak at +0.2%, y/y, down from +1.2% in November and below the consensus expectations for +0.5%. Electricity prices were the main downward driver. Analysts note that the inflation reading is much weaker than forecasted by the Norges Bank and would suggest another rate cut.
EU: Parliament group objects to a new draft of euro fiscal treaty; it needs more democratic controls and should do more to promote growth.
EU Said to Weigh Iran Oil Embargo Exemptions for Member States.
ITL: The Social Democrat Party Calls For an exit From EUR and EU.
FRF: Rumor denied by French Treasury that the country was to be downgraded within a tight time range.
FITCH: Rating agency calls for ECB to step up SMP program and increase its sovereign debt purchases in order to prevent a ‘cataclysmic’ collapse of the currency.
GER: Germany auctioned +EUR4b of five-year debt on Wednesday. The new 2/2017’s OBL auction received solid bidding. A total of +EUR9b bids were received, well above the average of +EUR6.8b at the last three-issues, resulting in a cover of 2.84 times.
GBP: UK trade deficit widened to -£8.6b in November. With the negative trade balance remaining disappointingly wide suggests a slog to rebalance the UK economy.
EUR: German GDP grew +3%, y/y, in 2011, implying a small GDP contraction of -0.1, y/y, in the fourth quarter. Germany is not the European “Atlas”!
EUR: Strong demand at auction for Spanish bonds and Italian bills. The Spanish treasury successfully auctioned +EUR9.98b of government bonds, double the amount it had planned. Italy sold 1-year bills at +2.735%, vs. +5.952% on December 12. In total, Italy successfully sold +EUR12b T-bills, meeting its target, and at the same time seeing its borrowing costs plunge in the country’s first debt sale of the year.
ECB: After keeping rates on hold, Draghi expressed his satisfaction that the auctions support the view that the provision of 3-year liquidity via LTRO’s is improving the financing backdrop for the peripheral sovereigns. With no indication of a rate change gave the single currency a boost.
ECB Press conference: Monetary policy to remain accommodative with policy makers ready to act.
ECB: Substantial downside risks to economic outlook persists.
ECB: Price developments to remain in line with price stability mandate.
ECB: Euro austerity measures are weighing on the output of the region.
ECB: Aim is to anchor inflation at or close to +2% over the medium term-it’s required to make its contribution to economic growth and job creation in the region. December inflation was at +2.8%.
BoE: they kept rates on hold at +0.5% and kept its target for its asset purchase program at +GBP275m.
EUR: Significant risks remain ahead with the Greek PSI talks and the completion of the haircut by months end.
EUR: Regional data continue to come in better than feared. The Euro-zones November IP fell -0.1%, m/m. It was better than the -0.3% forecasted. However, negative revisions to the October reading leave growth momentum poor.
ITL: Their IP grew +0.3%, m/m beating all expectations of -0.5%.
GBP: UK data continue to point to a weak 4Q GDP number. Their IP surprised weak in November, falling -0.7%, below the consensus forecast for -0.1%, m/m. However, manufacturing production happened to be less disappointing, falling -0.2%, m/m.
SEK: Inflation decreased to +2.3%, y/y, in December from +2.8%. The core-inflation registered a substantial fall to +0.5% from +1.1% and it is now at its lowest levels in nearly seven-years. Low inflation and weak growth point to a risk of a more dovish Riksbank.
ITL: Italian bond auction disappointed after their strong Bill issue. 3-year product saw a relatively poor bid-to-cover ratio of 1.2 times, while the 6-year came in at 1.6. Demand was greater for a smaller +4.25% coupon issue and a total of +EUR4.75b were allotted across all auctions.
S&P Rating: Several euro zone countries could face imminent downgrade by S&P as early as today
EU: Euro-zone posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b; however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus.
EU:IIF Says Greece Talks ‘Paused’ After No ‘Constructive’ Response
Should we be questioning if US data is beginning to top out? This week, US releases were less than enthusiastic, with jobless claims rising smartly and retail sales disappointing. The steady improvement in initial jobless claims rose a rather disturbingly large +24k last week, rising from a modestly upward revised +375k to +399k. Are we to see a large downward revision to the next NFP report? Employment statistics is to play a major role in this year’s Presidential race and to Obama’s reelection campaign. Up to this point, a notable improvement in US data has been particularly helpful for currencies geared to US and global growth. With the Fed still committed to stable policy through mid-2013, the dollar is expected to remain a good funding currency for risk trades.
Below are some other highlights of the week:
AMERICAS
CAD: Monthly building permits fell less than expected in November, -3.6% vs. -3.8%, (fourth decline in five-month) as lower planned construction of institutional, industrial and commercial building affect the first gain in residential building plans.
USD: US whole sale inventories rose less than forecasted in November (+0.1%) as distributors struggled to keep up with demand, a sign gains in manufacturing will keep the economy growing. Inventories followed a +1.2% revised gain in October.
CAD: CMHC housing starts was +200k units in December, up from +185.6k units in November 2011.
CAD: Canadian monthly new house prices rose slightly more than expected in November for the largest gain in six-months. Prices were up +0.3%, m/m and +2.5% y/y.
USD: Softer US data disappoints all markets. December retail sales rose +0.1%, ex-autos it declined -0.2%, completing the first fall in 18-months.
USD: Weekly US jobless claims benefits climb past expectations, surging +24k to a seasonally adjusted +399k.
USD: US trade deficit widened for the first time in five months, +10.7% to -47.7b vs. -45.5b. Rising oil prices lifted imports while exports to the Euro region slumped. The trade gap with China narrowed -4.3% to 26.87b
CAN: Posted a surprise trade surplus in November, +$1.07b from a -$0.5b deficit in October. Exports increased +3.2% (+1.7% was a price increase and +1.6% a volume increase).
US: Consumer confidence came in stronger than expected. US preliminary January Michigan CSI increased by 4.1 point to 74, a fifth straight improvement from an August market low of 55.7
For the first time sine the Asian crisis, China’s FX reserves fell in the last quarter of 2011. A $20.6b slip may only be a blip in China’s hoard of $3.18t in reserves. However, a reduction of this size has not been seen in nearly 14-years. Does it signal a change in sentiment in the Chinese economy? A fraction of the decline is due in part to the EUR’s depreciation, coupled with a smaller trade surplus between the regions. However, the most significant cause of the decline can be attributed to the flow of capital out of China. The Shanghai composite index fell -21% last year and as long as property prices keep falling, hot money has enough of a reason to want to exit!
Below are some other highlights of the week:
ASIA
AUD: Retail Sales stalled in November against consensus for a modest +0.4%, m/m, rise. Analysts believe further weakness in the coming months will have the market pricing in further RBA easing. Futures market is already pricing in a-25bp cut at the February meeting.
CNY: China reported ‘new’ Yuan loans totaling +CNY640b in December, up +15.8%, y/y, and above the consensus estimate of +CNY575b.
NZD: New Zealand trade data implied a small surplus of +NZD30m seasonally adjusted in November, with imports and exports growth broadly in line with consensus. Analysts fear for weaker trading partners’ growth. Softer demand may lead to further deterioration in NZ’s trade balance over the coming months.
TWD: Trade surplus fell to $+2.3b in December from +$3.2b in November. Slowing exports caused the trade balance to deteriorate more than expected i.e Exports to Germany fell -16%, y/y (Third consecutive monthly decline).
CNY: China’s export growth fell to +13.4% in December from +13.8% in November, while imports were on the weak side, rising by only +11.8%, y/y, compared with +18% consensus and +22.1% in November. This suggests softer domestic investment demand and weaker commodity prices. The trade balance recorded a +$16.5b surplus in December.
AUD: Australia building approvals rose +8.4% in November (after two months of over -10% declines). Perhaps the domestic housing market is benefiting from the RBA rate cuts.
PHP: Exports fell -19.4%, y/y, in November. Weak exports and tame inflation supports market expectations for a – 25bp cut from the Cbank in March.
MYR: IP rose +1.8%, y/y, in November, weaker than the +3.5% consensus expectations.
PBoC: Comments from their head of research bureau suggests “inflation pressures are unlikely to ease quickly”-perhaps no monetary easing anytime soon.
MYR: Export growth slowed to +8%, y/y, in November from +15.4% the previous month. The market anticipates the central bank to keep MYR broadly in line with other regional currencies amid the euro crisis.
CNY: Inflation slowed to +4.1%, y/y, in December from +4.2%. The Chinese government have warned against expectations for inflation to ease quickly and reiterated that stabilizing prices remained important on the government’s agenda. The market anticipates the PBoC to cut the reserve ratio in coming months to accommodate growth.
JPY: Japan’s current account surplus fell to +JPY138b in November, well short of the consensus estimate of +JPY248b. Note surplus erosion can help ease some pressures on the currency, compression of G10 “yield differentials and fragile risk appetite should keep the yen well supported in the near term”.
INR: India’s industrial production surprised on the upside, rising +5.9%, y/y, against a modest +2.1% growth.
IDR: Bank Indonesia (BI) left policy rates unchanged at +6%, most likely because of a rupiah. With inflation under pressure to fall, market is pricing in a -25bp ease at the next meeting.
KWN: The BoK left policy rates unchanged at +3.25% as expected, citing larger downside risks to global growth and subdued domestic demand. The market expects policy makers will ease in 2012, but only by -25bps given the lack of inflation pressure.
