Weekly Forex News January 27th 2013

Weekly Forex News January 27th 2013
The Euro finally broke out of recent range last week and ended as the
strongest currency on improvement in the banking system as well as overall
confidence. On the other hand, the Canadian dollar was the weakest
currency following the Bank of Canada's statement that dented any hope for
a rate hike and deeper selling was seen after a tame inflation reading. The
Aussie and Sterling were both weighed down by disappointing economic
data, and in spite of strong risk appetite as seen in rally in stock markets,
Canadian Dollar, Australian Dollar and British Pound were not supported.
Some recovery was seen in the Japanese yen after the Bank of Japan meeting
as markets were disappointed but selloff quickly resumed and sent US
Dollar / Japanese Yen and Euro / Yen through the 90 and 120 psychological
levels respectively.

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In the US, The House of Representatives approved the bill to suspend the
borrowing limit by a 285 to 144 vote, lifting the government's borrowing
limit of 16.4 Trillion Dollar until May 19th. IMF chief Lagarde warned that U-S
officials have to "consider the leading role played by the U-S economy in the
world is at stake". And she urged Congress to settle the debt ceiling issue
ASAP rather than "kick the can down the road a little bit longer for a little bit
farther". Lagarde said that "if they take the time to really sit down: rationally
and sensibly putting a little bit of their respective ideology on the side to
really focus on what is good for the economy and what is going to be good
for the rest of the world, that’s great."


In the Eurozone, the news that boosted Euro Dollar out from recent range
was the European Central Bank saying on Friday that 278 banks would repay
137.2 billion euros, or 30% of the long-term refinancing operation loan on
January 30th. That's significantly higher than markets' expectation of around
100 billion euros and was seen as a sign of better than expected
improvements in the long-troubled Eurozone banking sector. In addition,
economic data also supported the Euro. The German IFO business climate
index rose for the third month to 104.2 in January, up from 102.4 in
December. Also, that's the highest level since last June and beat expectation
of 103. The current assessment rose to 108 while the expectation gauge rose
to 100.5. Both beat market expectations. German ZEW economic sentiment
rose from 6.9 to 31.5 in January versus expectation of 12. That's also the
highest level since May 2010. The current situation gauge also improved
from 5.7 to 7.1 versus consensus of 6.2.


Eurozone ZEW economic sentiment also jumped sharply from 7.6 to 31.2
versus consensus of 12.2. Eurozone PMI indices improved more than
expected in January even though they're still staying in a contraction region.
Manufacturing PMI rose from 46.1 to 47.5 versus consensus of 46.6. Services
PMI rose from 47.8 to 48.3 versus consensus of 48. German PMI
manufacturing rose from 46 to 48.8 versus expectation of 46.8 while services
PMI jumped sharply from 52 to 55.3 versus expectation of 52. French PMI
indices disappointed though and deteriorated.


Sterling was sold off sharply against the Euro as Q4 GDP disappointed. The
UK economy contracted by 0.3% quarter on quarter in Q4, compared to
expectation of 0.1% contraction quarter on quarter and 0.9% growth in Q3.
The data showed some evidence of fall back from the boost by the Olympic
Games in Q3. And it raised concern that the UK is heading into a triple dip
recession. UK treasury said that the figures reflect that "Britain, like many
European countries, faces a very difficult economic situation." Chancellor of
the Exchequer Osborne said that the problems the UK is facing were "many
years in the making and there’s no magic solution," and it takes "hard work
and perseverance" to bring a lasting recovery. Bank of england minutes
unveiled that policymakers voted unanimously to leave the Bank rate
unchanged at 0.5% and 8-1 to leave the bond purchase plan unchanged at
375 Billion pounds.


David Miles favored expanding the stimulus amid concerns that the rise of
the pound would be detrimental to economic growth. The majority of the
Monetary Policy Committee members believed that economic developments
in December were 'modestly positive' and it was not necessary to cut
interest rates further or increase the size of bond purchases at that moment.
After its rate setting meeting, the bank of Japan doubled its inflation target
to 2% at the January meeting although this decision was apposed to by 2
members. Meanwhile, the central bank left the uncollateralized overnight
call rate unchanged at 0 to 0.1%. The Bank of Japan also surprised the market
by introducing an open-ended purchase program. After the current asset
purchase program, the central bank would purchase a certain amount of
financial assets each month without setting a completion date. Yet, the
market appeared dissatisfied that the program would commence only in
January 2014. The market had anticipated it would extend the current asset
buying program.

A key fact to consider is that Bank of Japan governor Shirakawa is going to
end his term in April. Prime minister Shinzo Abe is expected to choose a
policy dove to succeed Shirakawa and help him implement his 'Abenomics'.
Hence, even though the yen attempted to recover, it was only brief and the
up trend in US Dollar Japanese Yen and Euro Yen quickly resumed after
Deputy Economy Minister Yasutoshi Nishimura said that Dollar Yen's current
level at around 90 "can be said to be a correction of the strong yen, but it
isn't over yet". Also, Nishimura said that a level of 110 to 120 might be a
concern as that would raise import costs. Markets took that as an indication
that Dollar Yen at 100 wouldn't be a problem.


The yen was also weighed down by inflation data and December Bank of
Japan meeting minutes. National C-P-I core dipped 0.2% year on year in
December, down from November's 0.1% year on year. The reading stayed
negative in seven out of the past eight months with only a 0% reading back in
October. The details were even more worrying as persistent deflation
pressure was seen in almost every category with the dual-core measure,
which excludes fresh food and energy, down 0.6% year on year. The data
raised expectation that firstly the bank needs to raise its easing effort and a
2014 plan on open-ended asset purchase is simply not strong enough.
Secondly, political pressure on aggressive Central Bank easing will certainly
be increased in the months ahead.


Meanwhile, the December Meeting minutes showed that a few board
members "noted that it was necessary for the central bank to demonstrate
its aim to encourage a further decline in short-term interest rates -- thereby
narrowing or reversing interest rate differentials between Japan and other
economies: with a view to exerting influence on foreign exchange rates".
And, the members also expressed that "purchases of treasury bills should be
increased substantially" with one member noting that the bank of Japan
should also considering additional purchases of Japanese Government Bonds
during the further half of 2013. There was even a member who proposed
lowering the interest paid on excess reserves from 0.1% to 0% and cutting
the fixed rate fund rate from 0.1% to 0.0% but that was voted down by other
eight members.


The Canadian dollar was sold off sharply after the Bank of Canada left its key
rate unchanged at 1% as expected. Correspondingly, the Bank Rate stayed at
1.25% and the deposit rate at 0.75%. More importantly, the central bank also
revised lower its GDP forecast to 2% in 2013, down from a previous estimate
of 2.3%. The economy will reach full capacity in the second half of 2014 with
GDP accelerating to 2.7% by then end of that year. Inflation is expected to
average at 0.9% in the first quarter of 2013 and stay below 2% until the third
quarter of 2014. The Bank of Canada forecast inflation would be at 2% by the
fourth quarter of 2013. The Canadian dollar dived after the report as the
central bank saw less urgency for an interest rate hike. The Loonie suffered
additional pressure as CPI unexpectedly dropped 0.6% month on month in
December and was unchanged at 0.8% year on year.


That compared to expectation of an acceleration to 1.2% year on year. Core
CPI dropped 0.1% month on month and slowed to 1.1% year on year. That's
even worse compared to expectation of an acceleration from 1.2% to 1.4%
year on year. The data affirmed the case that a need for rate hike is "less
imminent" and without existence of inflation pressure, the bank of canada
will very likely stay unchanged for more time.
The Aussie was also weighed down as CPI rose 0.2% quarter on quarter and
2.2% year on year in Q4 versus expectation of 0.4% quarter on quater and
2.4% year on year. Treasurer Wayne Swan said the CPI result was "further
evidence that there has been no significant broad-based increase in
consumer prices as a result of the carbon price". The data should give the
reserve Bank of Australia room for a further rate cut if necessary. So far,
interest rate swaps are pricing in less than a 50% chance for the reserve bank
to cut another 25 base points to a record low of 2.75% in February. But after
all, another 25 base point cut is still generally expected within the next 12
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The IMF lowered its global economic forecast: The world lender forecast that
world GDP would expand 3.5% in 2013 and then 4.1% in 2014. These were
below October's estimates of 3.6% and 4.6% respectively. In the Eurozone,
the IMF estimated that the economy would contract 0.2%, down from
previous estimate of 0.2% growth. For the US, growth would ease to 2% this
year from the 2.1% estimated previously. Chinese economy would grow 8.2%
in both 2013 and 2014. The IMF noted that "the near-term outlook for the
euro area has been revised downward, even though progress in national
adjustments and a strengthened EU wide policy response to the euro area
crisis reduced tail risks and improved financial conditions for sovereigns in
the periphery". But, "the return to recovery after a protracted contraction is
delayed" and "Risks of prolonged stagnation in the euro area as a whole will
rise if the momentum for reform is not maintained." It also warned that
"adjustment efforts in the periphery countries need to be sustained and
must be supported by the center".

In the week ahead the Euro and dollar will likely remain strong against other
major currencies in the near term but it's a bit hard to determine which one
will be stronger even though the Euro is slightly preferred. US economic data
to be released next week will be key to determine this. This heavy weight
data includes durable goods, consumer confidence, Q4 GDP, non-farm
payrolls and ISM manufacturing data. The Federal Open Market Committee
will also meet this week but this will possibly be a non-event.


Weekly Forex News January 27th 2013

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