The FX markets are generally staying in corrective mode today and Euro retreats from recent rally on concern on Germany’s economy. The Japanese yen also recovers from recent losses following an official’s comments. Nonetheless, the moves are shallow so far and did nothing to change the bullish outlook in Euro and the bearish outlook in yen. Data from US are mixed. Retail sales rose more than expected by 0.5% in December while ex-auto sales also beat consensus by rising 0.3%. Though, empire state manufacturing index improved just slightly to -7.8 in January versus expectation of 0. PPI unexpectedly dropped to 1.3% yoy in December while core PPI dropped to 2.0% yoy. Markets have little reaction to the data.
Euro retreats against dollar and yen today as data from Germany showed that the country was hit harder by Eurozone debt crisis in Q4. The Federal Statistics showed that Q4 GDP in Germany dropped by a larger than expected -0.5% as weighed down by weak exports and corporate investments. The overall annual growth was pushed further down to a mere 0.7%, comparing to 3% in 2011 and 4.2% in 2010. Also, the quarterly data was the worst figure in nearly three years since the global financial crisis back in 2008/09. Though loss in Euro is so far limited as supported by another successful debt sales in Spain. The Treasury sold EUR 3.2b in 12-month bill and EUR 2.5b in 1.8-month bill. The combined EUR 5.7b exceeded maximum target of EUR 5.5b. The yield on the 12-month bill dropped sharply to 1.472% comparing to prior 2.665%. Yield on the 18-month bill also dropped to 1.687% comparing to prior 2.778%. Spain will later auction up to EUR 4.5b in 2015, 2018 and 2041 bonds this Thursday. Italy also sold 15 year bonds via banks today with strong demand.
The JPY is weighed down mildly by comments from Japanese Economics Minister Amari, who said that excessive weakness in yen could “cause a spike in import prices”. And while it benefits exports, it would have “harmful effects on people’s livelihoods”. It now looks like the overstretched yen crosses are losing upside momentum and needs to consolidate recent sharp rise. Nonetheless, there are strong expectation that BoJ would expand its easing program next week and double the inflation target to 2%. And there are risks that BoJ could surprise the markets by doing more. Current retreat in yen crosses are generally viewed as consolidative only and there is no change in the near term bullish outlook.
BoE governor King said to a parliament committee that “it is at a point where the economy is operating well below full capacity, the banking system is in a stretched position and we are clearly struggling to find instruments to ensure an economic recovery.” King also noted that “the main problem of the euro crisis is the ability to find a way of financing current account and trade deficits”. And, the so called banking union could just enable “countries which have banking systems that need to be recapitalized to have that recapitalization financed by other members of the euro area”. Meanwhile, King also said while ECB calmed markets, it can’t “resolve the underlying real challenges of either moving to a transfer union or finding a way to take sufficiently effective measures to change the competitiveness of the member countries of the euro area” And banking union isn’t the answer neither. Inflation data from UK showed CPI unchanged at 2.7% yoy in December, with core CPI dipped to 2.6% yoy unexpectedly. PPI input rose 0.3% yoy, output rose 2.2% yoy and output core rose 1.5% yoy. Housing data from UK saw RICS house price balance improved to 0 in December versus expectation of -8. DCLG house price rose more than expected by 2.1% yoy in November.
Yesterday, Fed Chairman Bernanke said that while there are some positives sing of improvements in the economy, “there is still quite a ways to go”. “Things are moving” even though not as fast as Fed would like to see. He also noted that quantitative easing is having positive effects on bringing longer-term rates down “pretty significantly” and is an “effective tool”. Regarding inflation, he said that he didn’t see much evidence of that and expressed his confidence that Fed has all the tools to “undo our monetary policy stimulus…. before inflation becomes a problem. Overall, Bernanke’s comment didn’t change the expectation that Fed wouldn’t exit from its policy easing until at least the end of 2013. Regarding the so called debt ceiling issue, Bernanke urged Congress to raise to the ceiling to “avoid a situation where our government doesn’t pay its bills.” And, “we’re not out of the woods because we are approaching a number of other fiscal critical watersheds coming up,”. He also said “the way to address it is to have a sensible plan for spending and a sensible plan for revenue.” US President Obama said criticized that “to even entertain the idea of this happening, of the United States of America not paying its bills, it is irresponsible, it is absurd.” And Obama noted that “while I’m willing to compromise and find common ground over how to reduce our deficits, America cannot afford another debate with this Congress about whether or not they should pay the bills they’ve already racked up.”
EasyForexNews Research Team