EUR: still resilient
Last week’s European Central Bank (ECB) meeting saw President Mario Draghi adopt a particularly accommodating stance, which led to a correction of the euro. According to Draghi, the risks surrounding the region’s economic growth remain on the downside – due notably to the lack of lending to the economy and stubbornly high unemployment.
Meanwhile, exports remain the sole engine of growth, and – despite the latest figures showing that inflation declined to 0.8% in December (from 0.9% in November) – the broader outlook on inflation seems balanced over the medium-term. However, Draghi made it clear the ECB is ready to act should inflation weaken further (though such risk is slight) and/or conditions in the money market deteriorate.
With all of this in mind, the EUR/USD has remained relatively resilient, holding just above 1.36.
In the immediate term, we believe the performance of the EUR/USD will be influenced by US domestic factors, especially the weak Employment Situation Report released last Friday. Looking to the near future, the EUR/USD will be affected by the late-January publication of the technicalities of the ECB’s stress-tests, as it will provide an opportunity to tweak the calculations of the recapitalisations needed by European banks.
JPY: still a little downside
The yen declined last week, with the USD/JPY clawing its way back towards 105. Indeed, the Japanese currency remains penalised by the Bank of Japan’s ultra-accommodating currency, while the US dollar is being boosted by the Fed’s tapering of its asset purchasing programme. Against this backdrop, speculative accounts remain very short on the yen.
The weakness of December’s US Non-Farm Payroll, meanwhile, weighed on the USD/JPY over the weekend. In the short term, we expect the pair to resume in the region of 102.5, though in the medium-term, we expect this parity to further increase towards 110.
That said, don’t expect the USD/JPY to fall below 102 this week, as a current account deficit for the second consecutive month is likely to be announced: a first for Japan With the trade deficit likely to deepen further, the current-account deficit will be of significant concern in the run-up to the April VAT hike.
CHF: undergoing a consolidation
The Swiss franc has started the year on the back foot, most likely in reaction to the outflow of capital, repatriated in the last few days of 2013 in anticipation of the year-end closing. The USD/CHF also drew on the strength of the US dollar, rising to a high of 0.9135. Similarly, the EUR/CHF rebounded to 1.2370 on account of the firmness displayed by the euro. In the short-term, the Swiss franc will remain downbeat, especially after the news that the unemployment rate increased to 3.5% in December – its highest level since 2010. This week, the EUR/CHF may well go on the upside to 1.243.
GBP: has remained firm
Sterling appreciated over the week just gone, with a high of just under 1.65, despite the slightly lower services Purchasing Manager’s Index (PMI).
The Monetary Policy Committee meeting was deemed a ‘non-event’ by financial markets, as there was no mention of changes to Governor Mark Carney’s forward guidance strategy. This is despite calls to lower the unemployment rate threshold – below which the Bank of England will start tightening its bank rate – from the current 7.0% to 6.5%. Indeed, the publication of the meeting’s minutes on 22 January will give us greater insight on what was discussed.
This week, watch out for manufacturing production (expected to increase by 0.4% month-on-month and by 3.3% year-on-year, confirming the strong increases posted by recent business surveys). Under these conditions, we expect the GBP/USD to extend its rise to 1.66, while we see the EUR/GBP weakening to 0.8165.
AUD/NZD: set to weaken to 1.05
The New Zealand dollar has shown some resistance in the face of a resurgent US dollar, boosted by some positive macroeconomic indicators. The currency was given a fillip from the strong increase in building permits, up 11.1% month-on-month in November after the October estimate was revised upwards to +0.3% from -0.6%. These figures further strengthen expectations the Reserve Bank of New Zealand will raise its official cash rate this year.
This week, watch out for the NZIER Quarterly Survey of Business Opinion and the publication of the latest property prices. As for the Australian dollar, it remains heavy, correcting notably after the decline of several leading indicators (such as the Performance of Construction Index and home-building permits) as well as copper prices. Over the coming days, the market will be on the lookout for the latest Australian employment figures. Given the likelihood of US long rates extending their upturn, the New Zealand dollar should continue to outperform the Australian dollar, with the AUD/NZD set to weaken to 1.05.
USD/CAD: set to appreciate towards 1.10
The Canadian dollar sharply corrected last week in reaction to the slump of the Ivey PMI to 46.3 in December (from 53.7 in November). Although this index is extremely volatile, it stoked expectations of a cut in the Bank of Canada’s overnight rate target that, bearing in mind inflation remains particularly low (0.9% year-on-year in December), Governor Stephen Poloz did not rule out.
The spread between the US and Canadian 10-year rates narrowed further to -8bp, a level not seen since July, pushing up the USD/CAD to 1.084, its highest level since 2009. In the short-term, the Canadian dollar will remain under pressure, with a not-insignificant probability of testing 1.10 after the publication of the US and Canadian employment figures. We therefore recommend moving back into the USD/CAD on any sign of weakness.
SEK: remains under pressure
The Swedish krona corrected last week after the minutes of the Riksbank meeting showed that two members were still expecting further cuts in the repo rate. According to Karolina Ekholm and Martin Floden (the two most dovish members of the board), there is leeway for cutting the repo rate. In particular, they pointed to persistent deflationary pressure, with inflation still near the zero-mark.
This week, watch out for industrial production (expected to increase by 1% month-on-month in November after a sharp 1.7% month-on-month contraction in October) and for consumer prices (expected to be flat). Under these conditions, the USD/SEK could appreciate to 6.67.
Natixis