Forex Exchange Morning Report

 

Market wrap

 

Markets stabilised in thin conditions, the US on holiday, but were jolted by further ratings news at the NZ open this morning. Standard & Poor's cut the EFSF (Eurozone bailout fund) from AAA to AA+ with a developing outlook (which means it may be revised up or down within the next two years). Until that announcement, Friday's Eurozone ratings downgrades appeared to have little residual impact. One indicator which was closely watched was the French auction of EUR 8.6b notes up to 12mths maturities. It went well enough, the 12mth awarded yield 5bp below the previous, although the total raised was slightly below the target of EUR 8.7b. Most Eurozone peripheral yields were well behaved (Portugal the notable exception with the 10yr yield up 200bp to 14.48% - a Euro era high), probably to due to rumoured ECB buying of Italian and Spanish bonds. The ECB slightly increased its buying last week from EUR 1.1b to EUR 3.8b and will sterilise the operation by off ering 7-day deposits. European equities (Eurostoxx 50) closed 1.0% higher and S&P500 futures were up 0.2% before the EFSF news. US 10yr treasury not futures implied a 3bp increase in yield overnight.

The US dollar index is little changed. EUR rallied from 1.2630 to 1.2669 during the London session, slipping to 1.2660 early NZ on the EFSF news. USD/JPY slipped from 76.87 to 76.70. AUD rose from 11.0274 to 1.0338 late London, slipping to 1.0313 on the EFSF. NZD rose from 0.7917 to 0.7967 and slipped to 0.7944. AUD/NZD rose from 1.2960 to 1.3015 before falling to 1.2970

Market outlook

 

AUD/USD and NZD/USD outlook next 24 hours: The Australian data calendar is empty but NZ has a business confi dence survey and electronic retail spending to watch today, as well as the Fonterra auction tonight. China data for GDP, industrial production and retail sales today will be important AUD momentum is fading but no reversal signals are yet apparent. We favour a test of 1.0255 minor support below today. Similarly, we expect NZD to test 0.7900.

Asia Open: S&P Has Dealt Another Blow To Europe

After markets closed in Europe, S&P downgraded the EFSF by one notch to AA+; just hours after a senior S&P official said that he expects Greece to default soon and days after the ratings agency downgraded 9 Eurozone nations. Nevertheless, Europe equities managed to rally following a successful bond auction in France and limited commentary from EU officials.

Attention in Asia will be focused on Chinese GDP which is due out a 1:00pm AEST. This figure has the ability to severely move the market if it differs from expectations, especially if the data shows that the world's source of demand is slowing significantly faster than expectations.

Themes:

The headline real GDP figure is expected to show a year-on-year increase of 8.7% for China, down from 9.1% in the previous quarter. Expect to see some possible risk asset shedding if the figure significantly disappoints the market, but traders could go the other direction and price in an increased chance for growth stimulus measures from the government.

Debt talks in Greece are at the forefront of investor sentiment. S&P Managing Director of Sovereign ratings Kraemer said in an interview with Bloomberg that he believed Greece would default and that authorities are working to avoid a disorderly default. This is not surprising given that the head of the IIF stated that the situation was becoming urgent, but also said current interest rates being offered by the Greek government were completely unreasonable.

Germany has reiterated its stance that the EFSF's funding was adequate and that it would not consider raising guarantees for the rescue fund.

NZ credit card spending was in-line with consensus estimates of -0.2%m/m, representing an unchanged figure from November.

European Stocks Rally After Positive Bond Auctions In France

Asian Markets are set to start the day slightly higher after European stocks advanced to a five- month high, snapping three days of losses, as France auctioned debt at a lower borrowing cost even after Standard & Poor's stripped the country of its top credit rating.

US markets were closed for the Martin Luther King Jr Holiday.

The Stoxx Europe 600 Index climbed 0.8% to 251.12 at the close, rising above its 200-day moving average to the highest level since Aug. 3. The benchmark measure earlier fell as much as 0.5%. The gauge erased its gains on Jan. 13, the final day of trading last week, amid reports S&P planned to downgrade several euro-area countries.

U.S. stock-index futures rose as French borrowing costs fell in the first sale of bills since Standard & Poor's downgraded the country. France sold 1.9 billion euros ($2.4 billion) of one-year notes today at a yield of 0.406%, down from 0.454% on Jan. 9. as investors shrugged off S&P's downgrade.
The euro weakened for a second day, falling to an 11-year low against the yen after Standard & Poor's stripped France of its top credit rating and cut eight other euro-region countries. The euro fell 0.1% to $1.2664, after dropping to $1.2626.

Oil climbed from the lowest price in almost four weeks as Iran said that a disruption to crude supplies through the Strait of Hormuz would cause a shock to markets that “no country” could manage. Crude for February delivery rose as much as $1.10 to $99.80 a barrel in electronic trading.

Gold firmed a touch on Monday in U.S. holiday-thinned trade, with firmer stock markets and a recovery in the euro from early lows taking some pressure off the metal, while traders digested last week's euro zone downgrades from Standard & Poor's. U.S. gold futures for February delivery were also up in electronic trading

Rising Signs of Worry Amid the Complacency

S&P's downgrades of a number of EU sovereigns appears to have had limited impact so far on risk appetite, which remains healthy on the surface. But beneath the surface signs of strain are increasingly evident.

EU focus

The key focus this week is the aftermath of the downgrade Friday by the S&P bond ratings agency of multiple EU countries, including Spain, Portugal and Italy by two notches, and importantly, the downgrade of two of the triple-AAA countries, Austria and France, by a notch. See our Chief Economist Steen Jakobsen's exhaustive run-down of the implications in his chronicle from this weekend. The most important direct fall-out from the downgrades is on the status of the EFSF, as only a shrinking minority of its sponsors are now AAA.
The other hot potato issue for the week is the Greek PSI deal, where talks have fallen apart and various scenarios are on the table - the market continues to express the opinion that Greek debt is only worth about 20 cents on the dollar while the PSI deal is for only a 50 percent haircut. The risk is that Greece renegs on the deal and imposes new harsher terms that effectively constitute a default, which might in turn trigger an exit from the Euro Zone because the “troika” (ECB, EC and IMF) refuses to advance any further bailout money. That would also have important implications for the ECB balance sheet and any contagion worries (Portugal the next in line) could deepen those worries.

EU bond auctions

So far today, the fall-out from the S&P downgrades has been minimal in terms of bond yields across Europe, but the ECB is doubtless intervening to keep a lid on things again. The auction calendar this week is fairly light (shorter term bills from France, Spain and Belgium on Mon-Tue) until Wednesday, when we have an auction of German 2-year debt and then on Thursday, the key day on the auction calendar, when Spain will be auctioning debt from 4- to 10-years and France will be auctioning a wide range of maturities, from 2 yeard up to almost 30 years.

Technical and Intermarket indicators - rising worry evident amid complacency

 

Intermarket technicals are inconclusive - bond yields are easing back to the bottom of the medium term range - pointing to continued safe haven seeking and expectations for low growth. But asset markets appear rather complacent and are perhaps warming up for the next round of expected liquidity from the Fed in the form of QE3 and possibly looking for another wave of stimulus from China. We noted very complacent investor surveys last week and some divergence in the VIX, both of which continued this week. The new development over the last week has been signs of increased worry in the likes of Emerging Market bond spreads and Junk bond spreads.

Equities

Looking ahead toward the end of this week for a heavier dose of "real economy" earnings reports from the likes of IBM and other US tech giants, though better indications on corporate earnings and outlooks are up next week. JP Morgan set the tone for weak bank earnings last week, with its major rivals reporting this week.
FX
Euro very weak, but is trade getting crowded? Aussie is getting odd safe haven behavior (considering its historically very pro-cyclical behavior) as a solid AAA sovereign in a world of increasingly ugly sovereign balance sheets elsewhere. But how would the Aussie fare in the event of a 8-10% correction in the S&P500? USDJPY and EURJPY at painful levels once again for Japan - will they intervene again soon?

Economic Calendar this week - highlights only

 

Today

• Markets in the US are closed for the Martin Luther King, Jr. holiday.

Tonight

• Chinese Q4 GDP, Dec. Retail Sales and Dec. Industrial Production data set for release tonight, with some risk of a downside risk in GDP, depending on how transparent China would like to make its current economic plight. Bloomberg expectations are running at 8.7% YoY

Tuesday

• UK Dec. CPI - is inflation finally decelerating in the UK and thus encouraging next round of QE?
• Germany Jan. ZEW - currently as low as lowest during financial crisis - interesting thing being that ZEW bottomed in July of 2008, therefore somewhat predictive
• US Jan. Empire Manufacturing - manufacturing surveys for January very interesting for the US as we wonder to what degree
• Canada - Bank of Canada rate - expectations very flat. The Canadian economy appears relatively healthy, though a housing bubble demise awaits and employment data has been souring for some time. There's hardly anything for the bank to get hawkish about.

Wednesday

• US Dec PPI and Industrial Production - US core inflation data needs to fade again soon if the Fed is to indulge in yet another round of money printing

Thursday

• Australia Dec. employment report - Aussie's star has been burning bright of late - could another bad employment report introduce at least a temporary setback?
• US Jan. Philly Fed - ditto for Empire survey above
• US Dec. Housing Start and Building Permits - resilience of late noted, but it's a long slog to normalization
• US Weekly Jobless Claims - a bit worry that last week's ugly print came at a time of year when firings are especially heavy - let's see if it was an aberration or a worry new trend in claims (even confirmation that the downtrend in claims has halted is bad news)

Friday

• UK Dec. Retail Sales - will heavy retailer discounting mean a shortfall like in the US?
• Canada CPI - high end of the range of late, but the BoC wants to turn a blind eye.

Further ahead

• Don't forget that the Chinese New Year comes early this year (Jan 23) and that much of Asia will be more or less off-line from late this week through to the week after next.
• Next week also features the next FOMC meeting, where we are likely to get more transparency on the FOMC members' thoughts on the trajectory of monetary policy.

Morning Forex Fundamental

EUR

'The more time passes ... the more we see signs it [three year refinancing operation] has been an effective policy measure' - Mario Draghi, the ECB president
ECB sees 'substantial' effect from its refinancing operation
Impact High
The European Central Bank's 489 billion euros allotted among euro area banks at a record rate of one per cent are supporting the region's economy, said the ECB president on Thursday.
'The extensive recourse to the first three year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence,' ECB President Mario Draghi told at news conference after the ECB kept its key rate at one percent.
'The more time passes ... the more we see signs it has been an effective policy measure,' Draghi said. 'This decision has prevented a credit contraction that would have been ... much, much more serious.'

USD

'You get better job growth, people hear about it and you get better sentiment and better spending' - Maury Harris, chief economist at UBS Securities LLC
Consumer sentiment rose more than expected in January
Impact High
U.S. consumer sentiment rose to eight-month high in January as Americans became more confident on the outlook for the economy. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment advanced to 74 from 69.9 at the end of the previous month.
'You get better job growth, people hear about it and you get better sentiment and better spending,' said Maury Harris, chief economist at UBS Securities LLC in New York.
Purchases early in 2012 'may not be quite as strong as the fourth quarter, but I still think you have an acceptable year in consumer spending,' he said.

GBP

'The trend [in producer inflation] is moving in the right direction, and this will contribute to lower consumer price inflation in 2012' - David Kern, chief economist at the British Chambers of Commerce
U.K. producer prices declined in December
Impact: High
U.K. producer output prices fell in December for the first time since June 2010, as input prices eased 0.6 per cent. Factory gate prices dropped 0.2 per cent from November, the Office for National Statistics announced on Friday.
'Though price inflation for both inputs and outputs is still relatively high in absolute terms, the trend is moving in the right direction, and this will contribute to lower consumer price inflation in 2012,' said David Kern, chief economist at the British Chambers of Commerce.
'As the squeeze on businesses and consumers eases, there will be scope for demand in the economy to improve gradually later this year.'

CHF

'Bond sales in Italy and France, because the countries have more problems, will offer more of a guide for the market' - Arnaud Scarpaci, a fund manager at Agilis Gestion SA
Swiss stocks slid on Friday
Impact: Medium
Swiss stocks closed lower on Friday on concern some euro area countries may be downgraded by Standard & Poor's in the next few days. These expectations were proven to be justified later that day.
The Swiss blue-chip index SMI, a measure of the largest and most actively traded companies, shed 0.36%, or 21.73 points, to 5,996.34. The broader Swiss Performance Index declined 0.30%, or 16.53 points, to 5,411.38.
Swiss Federal Statistical Office is to announce producer price inflation later today. Inflation dropped 0.8 percent in November after declining 0.2 percent in October.
 
JPY

'The ECB's liquidity injection is keeping the debt crisis from spreading' - Juichi Wako, a senior strategist at Tokyo-based Nomura Holdings Inc
Japanese stocks rose sharply on Friday
Impact: Medium
Japanese stocks rose on Friday, after Spanish and Italian borrowing costs decreased, a sign investors are more optimistic on the economic outlook for the countries.
The Nikkei 225 gained 1.36%, or 114.43 points, to 8,500.02, while the broader Topix advanced 1.02%, or 7.45, to 734.60.
'The ECB's liquidity injection is keeping the debt crisis from spreading,' said Juichi Wako, a senior strategist at Tokyo-based Nomura Holdings Inc.
'The yen's rise against the euro had weighed on Japanese stocks. Now that's taking a pause, the bias is for equities to be bought back.'

Press Review

Europe

S&P has downgraded ratings of 9 Eurozone countries, including Italy, Spain and Austria. France is likely to lose its triple-A rating to AA+, while Germany retained its AAA status with a stable outlook. Merkel has already said more has to be done to address the prolonged financial woes.
By January 30, the EU members will design the preliminary financial pact agreement to make the European Union more financially integrated.

Thomas Jordan was appointed as interim head of the SNB after P. Hildebrand resigned yesterday.
Euro Leaders Race to Salvage Rescue Plans

http://www.bloomberg.com/news/2012-01-16/euro-leaders-race-to-salvage-rescue-plans-rebuked-by-s-p-rating-downgrades.html

European leaders will this week try to rescue under-fire efforts to deliver new fiscal rules and cut Greece's debt burden as they urge investors to ignore Standard & Poor's euro-region downgrades.
Greek PM: Two Deals But No Drachma Ahead

http://www.cnbc.com/id/46004247

In his first and only interview since taking office, Greek Prime Minister Lucas Papademos took straight aim at those who suggest Greece should abandon the euro and return to the drachma as a way to solve the country's fiscal crisis: 'This is really not an option

USA

Although the latest US macroeconomic data - 8.5% unemployment rate, increasing consumer and manufacturers confidence, recovering property market and soaring durable goods sales - suggests the national economic recovery is adding to gains, economists fear the economy might be directly and negatively affected by the EU financial woes.

Iranian oil embargo, triggered by the US, is facing mixed acceptance in the global market. The EU are still resisting from participation in the embargo, along with several Asian companies.
Fed officials say not time to buy bonds now

http://www.reuters.com/article/2012/01/13/us-usa-fed-lacker-idUSTRE80C21T20120113 

Two top Federal Reserve officials, including a policy centrist, said on Friday the central bank should hold off buying more bonds to boost growth given a strengthening in the economy.
Jon Huntsman will leave Republican presidential race, endorse Mitt Romney, officials say

http://www.washingtonpost.com/politics/2012/01/15/gIQAt6c51P_story.html

Former Utah governor Jon Huntsman Jr., whose campaign for the Republican presidential nomination never took off, will quit the race Monday morning and endorse former Massachusetts governor Mitt Romney, according to campaign officials with knowledge of the decision.

Asia & Pacific

China's trade surplus unexpectedly rose last week as experts were expecting a decline (16B act./8B est.). The data suggests the Chinese economy remains intact for now to the EU debt crisis.
China and Japan signed a currency deal which would involve direct currency exchange between two countries, omitting the American dollar from their reciprocal operations.
China to ease controls on HK listings: regulator

http://www.reuters.com/article/2012/01/16/us-china-regulator-idUSTRE80F07120120116

China's securities regulator plans to relax controls on Hong Kong and overseas listings for Chinese companies and will push for issues of yuan-denominated shares in the offshore yuan market, its vice chairman Yao Gang said on Monday.
Asia falls after S&P's Europe downgrades

http://www.marketwatch.com/story/asia-falls-after-sps-europe-downgrades-2012-01-15

Asia markets fell on Monday after a string of downgrades from Standard & Poor's and stalled debt talks in Greece thrust Europe's ongoing debt crisis back into the spotlight

IMM CFTC: Euro Short Conviction Rising

Hedge funds and large investors used the uptick in EURUSD early last week to increase their already record large short position in the Euro currency. They sold another 16,286 contracts of Euro futures bringing the net holding to -155,195 contracts, a third consecutive week with a new record short.

The main currency benefitting from this selling of Euros were the dollar with the long position rising to USD 17.6 billion. The market has been net long dollars since September 2011 and is long the currency against every other currency listed on the IMM except for AUD, NZD and JPY.

It is interesting to note that short EUR positioning as a percentage of open interest stands at 53 percent, the highest level in five years, which is a clear indication that investors hold a strong conviction in the position.The chart below also shows how holders of long position are decreasing as the bounce has become more illusive.

The stronger AUD continues to benefit from its triple-A rating, outflows from Eurozone sovereigns and its close proximity to China as opposed to the stricken economies of Europe. Investors added 8,667 contracts last week bringing the net position up to USD 5.5 billion equivalent.

JPY longs build for the fourth week running, again most likely as a consequence of the turmoil in Europe. The net long position stands at USD 9.7 billion equivalent.

 

Eurozone Downgrade Fears Materialize

The euro recorded minute gains against its major counterparts as the markets open, following the downgrade of 9 eurozone nations by S&P on Friday. More specifically Italy, Spain, Portugal and Cyprus experienced a 2-notch downgrade, while Germany kept its triple A rating untouched. The move sparked a plethora of comments by EU officials, focusing on the timing of the downgrade and the need for a European credit rating agency. S&P justified the mass downgrade, mentioning unconvincing policy initiatives by European leaders to tackle the continuing debt crisis in the eurozone. Meanwhile, negotiations between Greece and the Institute of International Finance (IIF) appear to have been halted citing unconstructive response. With so many balls in the air, the next EU summit -planned to take place on January 30th - is expected to be yet another focal point in this seemingly never-ending thriller. The euro reached 1.2055 against the Swiss franc on Friday, after a week of confusion following Hildebrand's wife scandal, his resignation and apparent market appetite to test the 1.20 floor he had set.

The US dollar produced a softer opening against a basket of currencies on a day that US banks will be closed in observance of Martin Luther King Day. Versus the Japanese yen, the US dollar opened slightly lower at 76.97. The Japanese Prime Minister Noda shared his fears over Japan's credit rating after eurozone mass downgrade and called for the parliament to perform fiscal policies changes urgently.

The Australian dollar opened lower at 1.0290 versus the US dollar. Australia's Treasurer Shorten took the opportunity to point out 'Australia's rock solid economic fundamentals' in response to S&P's action, also mentioning 'the fiscal challenges facing Europe and other parts of the world'.


Oil prices opened higher at 98.79 dollars a barrel from 98.39. Gold opened lower at 1638.25 dollars an ounce from 1638.82. Silver opened lower at 29.6150 dollars an ounce from 29.7275.