Download FX Market Headlines EUR weakens dramatically Risk

FX Market Headlines
EUR weakens dramatically
Risk currencies decouple from the euro
DXY index heads for one year highs
Italian yields above the 7% unsustainable level
Strong Non farm payrolls fail to buoy risk sentiment
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During the early part of last week, the theme was buy risk and sell euro. Risk appetite was given a strong
boost by global manufacturing data from China to UK to US. While Euro selling persisted, risk markets failed
to extend rally even with a very solid employment report from US.
The US non farm payrolls report came in above expectations (+200k vs 155k expected) providing the lowest
unemployment rate in 3 years at 8.5%. This is a very closely followed announcement because not only does
the figure provide insight into the state of the labour market in the world’s biggest economy, but it is also
thought to be closely linked to the sentiment of US consumers, whose spending represents 15% of GDP.
Despite this, investors remained cautious ahead of the US earnings season and further developments from
the euro zone. The DXY index, which measures the performance of the US dollar versus a basket of
currencies headed for one year highs, however, the fact that a Federal Reserve official indicated that a
further round of quantitative easing may be appropriate may temper further gains.
The euro weakened consistently throughout the week, breaking below the 1.2700 barrier, with EUR shorts at
a new record and weakness seen against most other currencies (another new low for EURAUD at 1.2435),
except CAD. Unicredit, the Italian bank, struggled to raise capital and the share price reduced dramatically.
This emphasizes the issues banks are having with their deleveraging initiatives. The knock on effects of this
can be seen in the downgrade of Hungary to junk status. As an economy, Hungary relies on foreign banks to
supply 80% of credit in the country and with European banks reeling in credit, the economy may suffer
further.
Another negative for the euro was the fact that deposits at the ECB were at a record. This is bad news
considering the 3 year Long-Term Refinancing Operation (LTRO) offered at the end of last year by the ECB
were intended to be a measure taken to allow banks to borrow cheaply with the hope that the banks would
use the money to buy European debt. However, 10 year Italian yield closed last week above the
unsustainable 7% level and the county faces the test of paying out EUR 100 billion in bond coupons and
redemptions between now and April. Spanish yields also rose dramatically, the most in 17 years, close to
6%. Italian and Spanish bond auctions on Thursday and Friday will be watched closely. Absent a sustainable
solution to the European woes, the euro looks set to remain under pressure. Our Citi analysts forecast
further downside but urge caution on selling levels due to the speed of the decline over the past week. We
may see some consolidation before the next leg lower.
The FOMC minutes for the December meeting were also released last week, suggesting the Fed will focus
on communication strategy at meetings this year. Members agreed to include their “projections of
appropriate monetary policy” into the Summary of Economic Projections (SEP) beginning in January. The
SEP will also unveil “participants' current projections of the likely timing of the first increase in the target rate”
given their projections of future economic conditions. Moreover, there will be “qualitative information
regarding participants' expectations for the Federal Reserve's balance sheet” and introduction of a more
formal inflation-targeting framework.
Europe’s debt crisis continues to take centre stage with Merkel and Sarkozy set to meet in Berlin on Monday,
while Thursday brings the ECB policy meeting decision. Citi Economics expects the ECB to hold rates and
non-standard measures unchanged as President Draghi signals further downgrades to the economic
outlook. Absent German 5y and Spanish 4-5y bond auctions, key tenders in the regions are for short dated
bills in France, Austria, Greece, Spain and Italy. GBP Events on the Radar include the Bank of England
meeting on Thursday. Citi has raised its forecast for the BoE’s QE program to GBP600bn from GBP500bn.
“The next QE installment probably will be announced at the February meeting, but there is an outside chance
the MPC will pre-announce extra QE at the upcoming January meeting,” writes Michael Saunders, Citi UK
analyst.
In the US, the main data release is Retail Sales (Thursday), also watch Trade Balance and University of
Michigan Consumer Confidence Index (Friday). Plenty of Fed speakers next week starting with Lockhart
(Monday), Williams and George (Tuesday), Evans, Lockhart and Plosser (Wednesday) with Lacker and
Evans (Friday). Earnings season also kicks off with Alcoa (Tuesday) and JPMorgan (Friday). Canadian data
releases include Building Permits (Monday) and Housing Starts (Tuesday) while in Australia, we see Retail
Sales (Monday) and Building Approvals (Tuesday) and in New Zealand, Building permits (Monday). In
Switzerland, key releases include Unemployment Rate and Retail Sales (Monday).
FX Forecasts
Data Releases – The Week Ahead
USD:
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Jan. 9, Atlanta Fed President Lockhart to speak on the economic outlook in Atlanta.
Jan. 10, San Francisco Fed President Williams to speak to Clark County Economic Forecast
breakfast in Vancouver
Jan. 10, Cleveland Fed President Pianalto to speak to Chambers of Commerce in Ohio.
Jan. 10, Kansas City Fed President George to speak on the economic outlook in Kansas City.
Jan. 11, Chicago Fed President Evans to speak to the Rotary Club of Lake Forest and Lake Bluff,
IL.
Jan. 11, Atlanta Fed President Lockhart to speak on the economic outlook in Atlanta.
Jan. 13, Federal Reserve Board Governor Duke to speak on “Regulation and Credit Availability”
in Santa Barbara.
Jan. 13, Richmond Fed President Lacker to speak to the Risk Management Association of
Richmond.
Jan. 13, Chicago Fed President Evans to speak on the economic outlook in Carmel, IN.
Jan. 13, St. Louis Fed President Bullard to speak on “U.S. Economy and Monetary Policy” in St.
Louis.
Jan. 12, December Retail Sales: Total – Citi.0.3 %, Nov. 0.2 %, Oct. 0.6 %, Sept. 1.3 %; Ex Autos –
Citi. 0.4, Nov. 0.2, Oct. 0.6, Sept. 0.6 - Retail sales likely increased at a moderate pace in December. Motor
vehicle purchases were flat, but large retail chains reported healthy sales, especially at the end of the holiday
shopping season. By our calculations, core retail sales likely increased by a solid 6½% at an annualized rate
in the fourth quarter. This in turn indicates healthy gains in consumer spending. Note 1: Since retailers were
exceptionally promotional this year, the rise in retail sales, which is a revenue measure, translates to a solid
gain in real spending. Note 2: The yearend pattern of retail sales seems to be changing: Retailers started
promotions earlier and extended store hours, and people are shopping online in greater numbers. These
changes seem to be showing up in both employment and sales data.
Jan. 13, November International Trade Balance (Billions of Dollars): Citi. -45.0, Oct. -43.5, Sept. 44.2, Aug. -45.3, July -46.1, June -52.1 - Citi analysts look for a widening in the trade balance in November,
with both exports and imports rebounding from surprise declines in October. Part of the import widening is
likely to come from petroleum. Refiners’ acquisition costs jumped in the month at a time when seasonal
factors look for declines in the oil bill. Note: Based on this forecast and our projections for December, Citi
analysts believe that net exports will add about three fourths of a percent to GDP growth in the fourth
quarter.
Jan. 13, January Reuters/Michigan Consumer Sentiment Index (Preliminary): Citi. 73.0, Dec. 69.9,
Nov. 64.1, Oct. 60.9, Sept. 59.4 - Consumer sentiment likely continued to rebound in early January. Normal
influences all point to an improvement: Initial jobless claims continued to decline and retail gasoline prices
remain moderate. Finally, the turmoil that roiled equity prices at yearend has taken a holiday pause, with
prices up significantly since mid-December.
EUR
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Jan 11 German GDP, 2011 Flash Forecast: 3.0% YY (WDA), 3.0% YY Prior: 3.6% YY (WDA), 3.7%
YY - The flash estimate of 2011 GDP growth probably will show a slowdown in GDP growth after the decent
increase in 2010. Note that the statistical office will not publish 4Q data at this stage (out on February 15) but
might give some indication. Citi analysts expect a small contraction in 4Q GDP of around 0.2% QQ.
Jan. 12, ECB Board Meeting - More Unprecedented ECB Action To Come: In the first meeting in
2012, Citi analysts expect the Governing Council to leave unchanged both the main refinancing rate at 1.0%
and the non-standard policy measures. However, the ECB is likely to cut the refi-rate to an unprecedented
0.5% by mid 2012 and to engage in additional non-standard measures. Citi analysts expect the ECB to
expand the government bond purchases under the SMP, but the ECB is unlikely to start QE. While the
recent surge in the ECB’s Open Market Operations has so far mainly led to a surge in the deposit facility, Citi
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analysts expect that banks over time will use ECB funding to replace other funding sources. Furthermore,
Citi analysts expect that – although less aggressively than in 2009/10 – periphery banks will increase their
holdings of domestic sovereign securities
Jan 12, Euro area Industrial Production, Nov Forecast: -0.7% MM, -0.1% YY Prior: 0.0% MM, 1.6%
YY - After an unchanged reading in October, Citi analysts expect a contraction in euro area IP in November.
Reflecting the large fall in September, the average reading for the first two months of 4Q probably will be
down by 1.3% compared to 3Q.
Jan 13, Euro area Trade Balance, Nov Forecast: €1.4 Billion Prior: €0.3 Billion - After declines in
October and September, Citi analysts expect an increase in exports (by 0.5% MM) in November. With further
weakness in domestic demand, imports probably declined for the third consecutive month (by 0.3% MM) in
November. This would lead to a widening of the trade surplus in November.
GBP:
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Jan 11, Trade Balance – Goods & Services, Nov Forecast: £-2.0 Billion Prior: £-1.6 Billion - London
Time The trade balance improved quite sharply in October and Citi analysts expect a modest deterioration in
November as exports reverse part of the jump seen last month.
Jan. 12, BOE Board Meeting - Inflation finally is likely to fall sharply and return the 2% target in late
2012. With falling inflation and the stagnant economy, the MPC are likely to expand QE markedly further. Citi
analysts are raising our forecast for the QE program to £600bn from £500bn. The next QE installment
probably will be announced at the February meeting, but there is an outside chance the MPC will preannounce extra QE at the upcoming January meeting.
Jan 12, Industrial Production, Nov Forecast: -0.2% MM, -2.4% YY Prior: -0.7% MM, -1.7% YY;
Manufacturing Output, Nov Forecast: -0.2% MM, -0.5% YY Prior: -0.7% MM, 0.3% YY - Surveys indicate
that the manufacturing sector is shrinking and Citi analysts expect the YY growth of manufacturing output will
turn negative for the first time since January 2010. Worse probably lies ahead.
Jan 13, Producer Input Prices,(Dec Forecast: -0.7% MM, 8.4% YY Prior: 0.1% MM, 13.4% YY - With
commodity prices a little lower, Citi analysts expect input prices will fall a little in MoM terms which, with
helpful base effects, should be enough to pull the YoY rate down sharply.
Jan 13, Producer Output Prices, Dec Forecast: 0.1% MM, 5.0% YY Prior: 0.2% MM, 5.4% YY;
Output Prices Ex Tax, Dec Forecast: 0.0% MM, 5.0% YY Prior: 0.2% MM, 5.6% YY; Excluding Food,
Drink, Tobacco, Energy, Dec Forecast: 0.0% MM, 3.2% YY Prior: 0.0% MM, 3.2% YY - Output price
inflation has begun to slow in recent months and surveys suggest that a marked further slowdown is likely in
coming months. The seasonally adjusted three-month annualized rate for output prices ex food, drink,
tobacco and energy may well turn negative this month for the first time since 2004.
JPY:
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Jan. 12, Balance of Payments, Current Account (Nov) Forecast: ¥195.5 Billion NSA; ¥545.6 Billion
SA, Previous: ¥562.4 Billion NSA; ¥518.6 Billion SA - Citi analysts expect that the current account will
generate a ¥195.5bn surplus before seasonal adjustment (-79.5% YoY) and a ¥545.6bn surplus after the
adjustment (+5.2% MoM) in November. With the trade balance running deficits for two consecutive months
both before and after seasonal adjustment, the income balance surplus will likely continue to keep the
current account in the black. Reflecting sluggish overseas economies and the strong yen, exports are
expected to decrease MoM for two months. Imports are also expected to see a MoM decline in November
after a strong advance in October.
AUD:
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9 Jan, Retail Sales, Nov Forecast: 0.3%, Previous: 0.2% - A lift in consumer sentiment and small fall
in petrol prices should support a mild expansion in retail sales. Citi analysts forecast a 0.3% gain in
November. A stronger result is unlikely with employment declining in the month and liaison with retailers
suggesting no solid pick-up in sales activity.
10 Jan, Building Approvals, Nov Forecast: 6.0%, Previous: -10.7% - Expectations of a rebound in
building approvals after two extremely weak months has lead to our forecast for a 6.0% increase in the
number of house and apartment approvals in November. Citi analysts look for a strong increase in private
apartments and a more moderate gain in private houses. The risk is that the rebound in houses is greater
than Citi analysts expect, lifting the headline result above our forecast.