FX

November 28th, 2014 6:52 am | by John Jansen |

Via Marc Chandler at Brown Brothers Harriman:

arket Catches Breath After Yesterday’s OPEC-Induced Moves

– The OPEC decision to roll over existing quotas sent oil prices sharply lower, pushed European bonds and stocks higher, and generally gave the US dollar a boost

– There is much data for investors to digest today, but the key takeaway is that Japan’s economy continues to absorb the fiscal shock of the sales tax hike back in April

– After soft German and Spanish flash CPI reading yesterday, it is not so surprising that the flash euro area measure slipped to 0.3% from 0.4% in October

– Brazil finally has a new Finance Minister, yet the real has yet to gain much traction

Price action:  The dollar is broadly firmer against the majors.  NOK and CAD are underperforming, hurt in part by the continued plunge in oil prices in the wake of the OPEC decision Thursday to keep output unchanged.  The euro is trading near $1.2450, while cable is just below the $1.57 area.  After the deluge of Japan data today, dollar/yen is trading back above 118.  EM currencies are mostly weaker, with RUB the biggest loser as oil prices sink.  USD/RUB is making new all-time highs near 50.  MYR, KRW, and BRL are also underperforming, with the real finding little follow-through buying on Levy’s appointment.  MSCI Asia Pacific is little changed on the day, despite a 1.2% gain in the Nikkei.  Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open.  

  • The OPEC decision to roll over existing quotas sent oil prices sharply lower, pushed European bonds and stocks higher, and generally gave the US dollar a boost.  Today’s theme is more consolidative in nature.    At the same time, the dollar’s firmer tone against the yen helped lift the Nikkei while European stocks and bonds are struggling to extend yesterday’s advance.  
  • There is much data for investors to digest today, but the key takeaway is that Japan’s economy continues to absorb the fiscal shock of the sales tax hike back in April, while euro area flash November CPI slipped lower.  In Japan, part of the monetary policy response has already been taken.  The data may encourage a larger fiscal response in the form of a supplemental budget.  In the euro zone, the low inflation will fan speculation that the ECB could announce a sovereign bond purchase program as early as next week (though we remain skeptical).  
  • Japanese data can be summarized as low inflation, weak household spending, better than expected industrial output, and relatively tight labor market.  Core October CPI slipped to 2.9% from 3.0%, but when adjusted for sales tax increase (BOJ estimates it boost CPI by two percentage points), it eased below 1.0%.  The core November measure for Tokyo also ticked down further to 2.4% from 2.5%.  The 5% decline in the yen this month is expected to help renew the upward pressure on prices.
  • Overall household spending rose 0.9% in October after a 1.5% increase in September.  It still leaves the year-over-year rate 4% lower than a year ago.  Retail sales dropped 1.4% in October, after rising 2.8% in September.  Separately, Japan reported industrial production rose 0.2% in October.  The consensus had expected a 0.6% decline after September 2.9% rise.  The year-over-year rate was -1.0%.  The consensus expected -1.7%.  The unemployment rate slipped to 3.5% from 3.6% and the job-to-applicant ratio rose to 1.10 from 1.09.  
  • The dollar had eased to JPY117.25 yesterday, but recovered after the OPEC decision to JPY117.80, and has built on those gains today.  The greenback has approached JPY118.25, but with US 10-year Treasury yields back at 2.20% (from 2.33% on Monday), there seems to be a reluctance to push the dollar much higher now.  
  • After soft German and Spanish flash CPI reading yesterday, it is not so surprising that the flash euro area measure slipped to 0.3% from 0.4% in October.  The core rate was unchanged at 0.7%.  The key issue is whether this is sufficient to spur the ECB into action next week.  We are not convinced it is ready to surmount the legal, political, and operational hurdles associated with a sovereign bond purchases program, though speculation is running high.  European bond yields, periphery, and core fell to new record lows yesterday and are consolidating today.  
  • Separately, we note that there has been an uptick in German consumption, which many critics have called for by the traditional export machine.  This was evident in the Q3 GDP report earlier this week and again in today’s October retail sales report.  Retail sales jumped 1.9% in October, after a 2.8% decline in September.  The consensus had anticipated a smaller bounce-back.  
  • The German consumption contrasts with the French consumer strike.  Consumer spending fell 0.9% in October.  The consensus had forecast a 0.3% increase.  French consumption has fallen in three of the past four months, and the year-over-year rate has fallen to a mere 0.2%, not the 1.0% the consensus expected.  
  • Meanwhile, EC President Juncker, who easily survived the censure vote yesterday, has indicated that fining Italy and France for fiscal excesses would be the easy thing to do.  Instead, he intends to give both countries three more months to get their fiscal house in order.  How bold and brave.  He is asking for a detailed schedule of economic reforms, which specifically as to when the government cabinets will adopt the reforms and when they will be approved by parliament, as if either Hollande or Renzi can do so confidently.  
  • Europe prides itself on being rule-based.  It makes rules for itself that it either ignores or modifies when it suits.  This practice cannot help but undermine the institutional credibility, and put more pressure on monetary policy to do things it is not really equipped to do.  As we have pointed out before, Merkel is often praised for being a great political tactician.  She is playing with a strong hand.  
  • When everything is said and done (more is said than done), France has played extremely well with a weak hand.  The economy is in poor shape, even though it expanded more than Germany in Q3.  The government is terribly unpopular.  Yet the ECB has talked the euro down and is expanding its balance sheet, like France has advocated.  It has been given more time to reach EC budget targets, and even then it has taken unilateral action to delay it even further, with little cost in terms of yield or political pushback.  
  • The euro itself is about half a cent lower than where the North American session left it on Wednesday, which was a little above $1.2500.  Without fresh impetus from North America today, where there are no US economic reports, the euro is likely to consolidate ahead of the weekend.  Canada reports Q3 GDP.  It is expected to be around 2.1%, down from 3.1% in Q2.  The drop in oil prices weighs on sentiment for the Canadian dollar.  The Bank of Canada meets next week, but is widely anticipated to be on hold.  
  • Brazil finally has a new Finance Minister.  As expected, Joaquim Levy will replace Guido Mantega.  At his appointment Thursday, Levy announced a primary surplus target of 1.2% of GDP in 2015, followed by 2% in both 2016 and 2017.  This is hardly an aggressive tightening, but even then, the targets will be hard to meet given the absence of growth.  Earlier today, Q3 GDP growth came in at -0.2% y/y, and expectations for full year growth are at 0.3%.  For 2015 and 2016, consensus is at 1% and 2% growth, respectively.  BRL has already given up its recent gains, with USD/BRL back to testing the week’s high near 2.5525.    
  • India reports Q3 GDP, expected to rise 5.0% y/y vs. 5.7% in Q2.  Despite this possible hiccup, Modi has inherited an economy that for the most part was already in the process of bottoming.  Growth should accelerate in Q4 and into 2015.  Price pressures have fallen, but upside risks from recent fuel price hikes remain in play.  As such, we see the RBI on hold but with a hawkish bias.  We think the rupee should outperform within this weak EM environment.    
  • Colombia central bank meets and is expected to keep rates steady at 4.5%.  With price pressures easing and the economic headwinds growing, we think the central bank will reverse its tightening cycle next year.  Lower oil prices are a serious concern for Colombia, as oil is its top export product.  The peso is likely to continue underperforming.
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