Currency Focus
USD - Finally starting to see some positive traction on the deficit and we're seeing some benefit from the oil component. If we're stabilizing on the trade deficit, that will be a net dollar positive going forward. The post-meeting statement after the Feds interest rate meeting echoed what the Fed officials said recently. The Fed expected the economy to expand at moderate pace. They said the inflation pressures are likely to moderate over time. As usual they added the timing of additional firming depends on the outlook for inflation and economic growth. Fed continues to hold an inflation bias, the market dismisses that and has dismissed that for quite some time, and I see no reason the market would become more concerned about the Fed tightening unless the inflation news becomes more worrisome. The message here is that the Fed is going to keep policy unchanged for an extended period of time. (RETAIL SALES) It underpins the US Federal Reserve's belief that the US economy is expanding at a moderate pace, and it looks like Christmas has started off on a firm footing. So yesterday we've a solid numbers from the Trade Balance and now today we have a great numbers from the Retail Sales. Now lets wait for the Inflation data and what it stores.
GBP - The November inflation data will not be very well received at the Bank of England, and will undoubtedly fuel expectations that interest rates are headed higher in 2007. I wouldn't get carried away by the CPI data. I fear retail sales Thursday could be on the soft side. The fog surrounding the outlook for UK interest rates may now be clearing. However, data later in the week may not be so supportive. In particular, retail sales which surprised on the upside last month are likely to disappoint this time around, which may make for a choppy week for the pound. The rise in RPI inflation ... will heighten concerns over a pick-up in wages growth in the forthcoming pay round. As such these numbers support our view that a February rate hike is still a bit more likely than not. CPI data will give hawks on the MPC more ammunition to argue the case for a further rate hike next year, perhaps at the February inflation meeting, and should help provide a further boost to sterling in the near term. Now higher infation and higher average earnings will put immense pressure on BoE MPC on further rate hikes. A much better than expected result in UK unemployment rolls sparked a small rally in the pound on an otherwise uneventful night in the currency markets. UK employment contracted by -5.7K versus expectations of a rise of 4K. Furthermore, data from the month prior was revised lower to -3.6K from 1.2K originally reported while average hourly earnings improved as well rising to 3.8% versus 3.7% forecast.
JPY - The possibility of a (BOJ) rate rise next week is falling, so it's hard to buy the yen. It's a lot easier to buy yen crosses.
AUD - Clearly, businesses still see recent strong trading as being temporary in nature, with slower growth in prospect in the face of tighter monetary policy, slowing global (especially US) growth, and the drought. Our assessment is also that domestic demand will slow, but that core inflation is still likely to remain above the target range till mid-2007. Hence, the most likely rate outcome is for the Reserve Bank of Australia to be on hold for a considerable time period while it assesses the impact of the tightening it has already delivered...My view has been that core inflation pressures are continuing to build in the economy, and there will be insufficient evidence that the previous three rate increases have slowed the economy enough to give the bank confidence that inflation will slow.
CAD - The bank's comments point to unchanged policy at the next fixed announcement date on Jan. 16, and likely beyond. We continue to expect rates to remain stable through 2007. The Canadian trade picture is continuing to soften, whereas in the U.S. their trade deficit shrank substantially which of course is a good thing. Clearly a Canadian dollar negative and indeed we are seeing a further push in that direction. It has indeed played out precisely as you'd expect
GBP - The November inflation data will not be very well received at the Bank of England, and will undoubtedly fuel expectations that interest rates are headed higher in 2007. I wouldn't get carried away by the CPI data. I fear retail sales Thursday could be on the soft side. The fog surrounding the outlook for UK interest rates may now be clearing. However, data later in the week may not be so supportive. In particular, retail sales which surprised on the upside last month are likely to disappoint this time around, which may make for a choppy week for the pound. The rise in RPI inflation ... will heighten concerns over a pick-up in wages growth in the forthcoming pay round. As such these numbers support our view that a February rate hike is still a bit more likely than not. CPI data will give hawks on the MPC more ammunition to argue the case for a further rate hike next year, perhaps at the February inflation meeting, and should help provide a further boost to sterling in the near term. Now higher infation and higher average earnings will put immense pressure on BoE MPC on further rate hikes. A much better than expected result in UK unemployment rolls sparked a small rally in the pound on an otherwise uneventful night in the currency markets. UK employment contracted by -5.7K versus expectations of a rise of 4K. Furthermore, data from the month prior was revised lower to -3.6K from 1.2K originally reported while average hourly earnings improved as well rising to 3.8% versus 3.7% forecast.
JPY - The possibility of a (BOJ) rate rise next week is falling, so it's hard to buy the yen. It's a lot easier to buy yen crosses.
AUD - Clearly, businesses still see recent strong trading as being temporary in nature, with slower growth in prospect in the face of tighter monetary policy, slowing global (especially US) growth, and the drought. Our assessment is also that domestic demand will slow, but that core inflation is still likely to remain above the target range till mid-2007. Hence, the most likely rate outcome is for the Reserve Bank of Australia to be on hold for a considerable time period while it assesses the impact of the tightening it has already delivered...My view has been that core inflation pressures are continuing to build in the economy, and there will be insufficient evidence that the previous three rate increases have slowed the economy enough to give the bank confidence that inflation will slow.
CAD - The bank's comments point to unchanged policy at the next fixed announcement date on Jan. 16, and likely beyond. We continue to expect rates to remain stable through 2007. The Canadian trade picture is continuing to soften, whereas in the U.S. their trade deficit shrank substantially which of course is a good thing. Clearly a Canadian dollar negative and indeed we are seeing a further push in that direction. It has indeed played out precisely as you'd expect
posted by Naveen Pantera at 9:26 PM
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