Just as Draghi’s “whatever it takes” was overused last year, “tapering” has become the curse word of 2013. Moment of truth this week – will Fed pull the trigger, or just…pass the baton?
Figure 1. Greenspan – The Economist cover (January 2006)
The expectations for Dectaper: Bloomberg survey (34%), WSJ (24%), Reuters primary dealers’ (22%)…our economists call 50%. The labor market has been key, if not the only factor, supportive of “taper”. The missing bit is inflation momentum (last week’s PPI and import prices disappointed). Fed could easily fix that by taper and tweaking forward guidance, a bad combination for USD. Introducing inflation floor has been hinted by Fed, is basically a free option, but could be saved for later: this Tuesday CPI (November) is expected to tick up not least due to base effects, and the short rates are still “behaving”.
Figure 2. Excluding rents…inflation fading
You can bring a horse to water … but can’t make it drink. A Christmas gift to ECB – a final huge 22.7bn repayment in LTROs (Italy doing homework?), and the money market is getting tighter. The EUR-bears are grabbing upon the story that ECB’s weariness of sovereign-bank nexus will cause banks scale back on periphery bonds…But is this going to prevent foreigners from flooding in? Meh. Net external assets have been growing, and given incentives, the great rotation from bonds to stocks and across region rebalancing will likely target Europe next year, supporting the EUR. Leading indicators and previous survey (new orders, etc) suggest tailwinds for flash PMIs, this week, and at least until March.
Technically, some profit taking on EURUSD doesn’t surprise. But overall outlook unchanged. I am still long (from 1.3450) for new highs against 1.3480. EURUSD support at 1.3700, then 1.3510/30. EURUSD resisted the 1.3835, where many are claiming to be short EURUSD. Thus… it doesn’t take a genius to imagine the move we get if it gives. Maybe just not yet… note lack of conviction seen e.g. in the options market (e.g. 12M 25D has moved down from November highs as EURUSD moved up). Patience is virtue.
Figure 3. EURUSD channel support at 1.37
The UK labor market improving and unemployment rate will likely drop further (our economists call 7.4% from 7.6%). I do like GBP still, but short term think it can correct lower. Retail sales gain, to be released this week, may be weaker than consensus project (0.3 m/m): softer survey data (BRC, CBI) and consumer confidence have paused rising, still no real wage growth. Note, inflation, even though at high levels relative to G10 – has shown fastest deceleration in G10 recently, likely stable this week (2.2% y/y)…but another drop would hurt GBP. The EURGBP long from the previous week still on. The 1.6280 on GBPUSD is key resistance, I told a few weeks back a “buy limit” around here… but think could wait for lower levels (1.61s).
Figure 4. EURGBP – continue to 0.86 is preferred
Abenomics work – weaker JPY. Abenomics won’t work – weaker JPY. Sounds like a win-win game. I believe “Abenomics works” should support local stocks initially… but so it has (75% rise in Nikkei 225 since last November…moderation is virtue?!). If it turns out that QE hasn’t worked, well then… thinking about more QE than now is not what common sense perceives as “normal”. So far signals are mixed, but most effects are mostly price, not quantity (read: weaker JPY), with household wage growth still at 0. The Q3 GDP revised sharply down, with capex still weak. Private sector may face new challenge next summer after the 3% rise in the sales tax. I am skeptical. Expect nothing from BoJ meeting this week. Hold USDJPY short (from 102.70), very likely into January, where the action may take place.
Figure 5. Once in decades surge…Nikkei 225: take profit, anyone?
Figure 6. Relative macro indicators do not justify USDJPY at these levels…
Home sweet home…not so sweet inflation for Sweden disappointed again, with Riksbank’s preferred underlying (CPIF) coming at 0.7% y/y below the 1.1% Riksbank’s projection. This has put the odds toward a 25bp cut this Tuesday. EURSEK broke the 9.00 limit on (surprisingly) dissapointing industrial data. Even a short term recovery (stronger labor market figures recently) and no cut this week would still leave the overall picture as „buy on dip“. Ignoring all data for the moment, this is just a comeback to the pre-crisis range…
Figure 7. EURSEK – normalization…
…But if you think things are better in Norway…tune in for Friday’s employment figures. I’m still short NOKSEK into next year. Parity! For fairness sake.
Nordea