The Big Picture • The dollar was generally lower this morning although without any US-specific news to move the currency. US stocks, bonds and Fed Funds futures were little changed and hence gave no clear direction to the market. • AUD was the biggest gainer after Q4 inflation came in much higher than expected at +0.8% qoq, vs a forecast of +0.4%. This lifted the yoy rate of change to 2.7%, meaning it’s in the upper half of the Reserve Bank of Australia’s 2% to 3% range. That makes it more difficult for the RBA to cut rates in the future, especially as prices for domestic goods and services rose significantly faster (3.7% yoy) than traded goods (+1.0%). As the recent decline in the AUD feeds through to traded goods it will lift the overall inflation rate even further. That may force RBA Gov. Stevens to stop trying to talk down the currency, which has been a major reason why it’s been declining recently. My view is that lower inflation is a global phenomenon, not just local, and that the RBA will not be concerned about a slight uptick one quarter. I therefore do not expect them to stop their campaign for a lower AUD and expect AUD to continue to depreciate. • JPY also gained vs USD overnight after the Bank of Japan refrained from taking any new measures at its Policy Board meeting that ended today. I can’t believe anyone expected them to take any measures so I think this is just an excuse for profit-taking. Since most indicators are generally moving in the direction they expect, I think they are likely to wait until after the hike in the consumption tax later this year to gauge the economy’s response before taking any further measures. I expect the yen to resume weakening in the near future, particularly if (as I expect) the Fed does continue tapering off its bond purchases at this month’s meeting. That should encourage more investors to switch their funding out of USD and into JPY and set the stage for a further decline in the yen. • On the other hand, CAD was the main loser vs USD as the market priced in today’s Bank of Canada meeting, although it recovered from its lows of the day. Economists unanimously expect the BoC to keep its benchmark interest rate at 1.0%, so the focus will be on the press conference afterwards and whether Governor Poloz provides any clues about lowering rates in the future. Confirmation that the BoC favors an easier policy is likely to put further downward pressure on CAD, in my view. • Another round of snow and freezing temperatures in the US gave natural gas another lift upwards. • Despite the weaker dollar, gold and silver were both down sharply. Even platinum fell. Again this is a discouraging sign for sentiment towards the precious metals. • During the European day, investors’ focus will be on the release of UK unemployment rate. The rate is estimated to have fallen to 7.3% in November from 7.4% in October, closer towards the BoE’s 7.0% threshold for considering a rate hike. Although the Bank has said it is willing to maintain a loose policy even after the threshold is reached, especially with no concerns on inflationary pressure, we expect the market to react positive on the release and push GBP higher. We also get the minutes of the Bank of England’s January meeting. From US, the only indicator coming out is the MBA mortgage applications for the week ended on January 17. As for speakers, Riksbank deputy governor Per Jansson will hold a presentation on the economic situation at a seminar and BoE’s Ian McCafferty speaks at the Nottingham Business School.
Posted on: Wed, 22 Jan 2014 09:26:23 +0000
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