The week will be begin in sour mood for risk assets following a sell off in US equities on Friday and oil prices extending their slide. Risk appetite will also be impacted by news reports of hostages being taken in a Sydney café. Meanwhile Japanese Prime Minister Abe’s decision to call snap elections has paid off, with his ruling coalition gaining 326 seats, and maintaining its “super majority”. Despite his own falling popularity, Abe capitalised on the disarray within the opposition. USDJPY edged lower in the wake of the outcome, although this appeared to be largely due to general USD weakness and rising risk aversion, with the USD failing to benefit from encouraging data at the end of last week, including a strongerthan- expected bounce in December University of Michigan consumer sentiment. Japanese data this morning were mixed and have had limited impact on the JPY, with the Q4 Tankan survey revealing, on balance, improving confidence among non-manufacturers but declining confidence among manufacturers. In Asia this week, the main data highlight includes the December HSBC China “flash” manufacturing PMI tomorrow, where we expect a reading of 50.1 (consensus 49.8). Stabilisation in the PMI is unlikely to help the CNY, with the currency likely to continue to take a weaker tone. There are several central bank decisions this week to chew on too, including Sweden, Hungary, Czech, Thailand and Taiwan. We expect no move from any of these central banks despite ongoing declines in inflation. However, the main event in the this week is the Fed FOMC meeting on Wednesday, where we and much of the market expect the Fed to drop its “considerable time” policy guidance and move towards a more data-dependent approach. Given that this is largely priced in the market impact is likely to be limited, although it will at least reinforce the divergence between the policy stance of the Fed and other major central banks, which we believe is medium-term USD bullish. Ahead of this there are several US data releases today, including December Empire State manufacturing, November industrial production and the December NAHB housing index. We look for readings of 12.00, 1.2% m/m and 58, respectively, versus consensus expectations of 12.00, 0.7% m/m and 59. Despite expectations of relatively firm data and a shift in Fed language, the USD may face more near-term pressure amid thinning year-end liquidity and position liquidation. Similarly carry trades continue to be at risk into year-end, and we have either had to take profits on have been stopped out of all of key EM FX carry trades versus the EUR.
Posted on: Tue, 16 Dec 2014 09:08:31 +0000
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