Euro Rally, Yen Decline Extended

Published 02/04/2013, 05:02 AM
Updated 03/09/2019, 08:30 AM
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While some volatility was seen in the markets last week, the overall trend didn't change. Euro strength and yen weakness continued to dominate. Indeed, it should be noted that some important technical levels were taken out decisively, including 1.35 in EUR/USD, 120 in EUR/JPY, a medium term trend line resistance in EUR/GBP, and 1.30 in EUR/AUD. All these developments indicated strong underlying momentum in Euro and the strength was rather broad based. That's also a clear indication of funds flowing back to Eurozone from everywhere as sentiments stabilized. Meanwhile, despite some hesitations, yen crosses were bid up again towards the end of the week. And, both USD/JPY and EUR/JPY took out a near term channel which indicated accelerations. We'd anticipate the trend to continue.

Elsewhere, note that firstly, in spite of a rebound attempt, Sterling ended up the second weakest currency last week as economic data showed that recovery in UK would stall. Aussie remained weak and was weighed down by RBA expectations as well as mixed China data. Canadian dollar staged a strong rebound last week but the price structure still suggested that it's merely a correction. Swiss Franc, continued to track Euro closely as EUR/CHF is bounded in range. Mixed data from US didn't give dollar a clear direction as it just followed others. Looking forward, we'd see Euro buying and yen selling to continue. Sterling should still be avoided as it should be overwhelmed by Euro. Aussie short could be maintained but better be against Euro rather than dollar. Dollar will continue to have no clear direction in general. So we'd prefer to continue EUR/JPY long ahead.

Fed maintained the pace of asset purchases at US$ 85B and left the policy rate unchanged near 0%. There were few changes in the policy statement. Yet, policymakers noted that 'growth in economic activity paused in recent months', suggesting the monetary stance should remain accommodative. The central bank should remain in a 'wait-and-see' mode so as to monitor the impacts of fiscal austerity, in particular expiration of the payroll tax holiday expiration. More on Fed Saw Further Downside Risks On Economy While RBNZ Set More Bullish Tone. Economic data from US were mixed. Q4 GDP showed unexpected contraction of -0.1% versus consensus of 1.2% growth. The GDP price index also rose much less than expected by 0.6%. Conference board consumer confidence dropped more than expected to 58.6 in January, comparing to expectation of 64. That was the worst reading since November 2011 and the 8.1 point drop from December's revised reading of 66.7 was the largest deterioration since August 2011. However, ISM manufacturing index beat expectation and jumped to 53.1 in December. NFP showed US job market grew by 157k in January, similar to expectation of 155k. Prior month's figure was revised sharply up from 155k to 196k. However, unemployment rate unexpectedly edged higher from 7.8% to 7.9%. Headline durable orders rose strongly by 4.6% in December versus expectation of 1.9%. Ex-transport orders also rose more than expected by 1.3% versus consensus of 0.8%.

Euro's strength is a clear indication of continuous improvement in confidence on Eurozone. Another clear indication was that Italy sold maximum target of EUR 6.5b in 5- and 10-year bonds with steeply lower yields. The smoothness of the auction showed markets are calm regarding situation in Italy, even though there are just over three weeks before an important parliamentary elections. Sterling, on the other hand was weighed down by weak data UK PMI manufacturing missed estimated. Overall bearish development in the pound was driven by weak economic data, fund flows back to Eurozone and next BoE governor Mark Carney's comments. The Treasury Committee of the House of Commons will ask Carney to have a hearing on February 7 on the current policy framework. Sterling's direction, if not down, will be more dependent on this event.

The Japanese government raised 2013/14 growth forecast to 2.5%, comparing to August projection of 1.7%, as the country emerge from recession. CPI growth is expected to be at 0.5%. Finance minister Aso predicted that there will be JPY 43.1T in tax revenue in 2013/14. Total spending is expected to be at JPY 92.6T while there would be JPY 42.85T raised from bond issues. That would be the first time in four years that tax income would exceed new debts. Aso said that for three years the "bond issuance exceeding tax revenue is abnormal," and it's a "big deal" it's turned around. However, some economists are skeptical on whether tax revenue could fall short of the estimate.

Kiwi was supported after trade balance unexpectedly showed NZD 486m surplus in December comparing to expectation of NZD -105m deficit. That was indeed the largest surplus figure since 1991. RBNZ announced to retain the OCR at 2.5%. The meeting statement was more upbeat, noting that global growth is set to recover in 2013 while strength in New Zealand's economic expansion would bring 'inflation slowly back towards the 2% target midpoint'.

China's manufacturing PMI unexpectedly dropped to 50.4 in January, down from 50.6 in December and was lower than expectation of 51.0. Though, the HSBC manufacturing PMI was revised up to a two year high of 52.3, up from preliminary reading of 51.9 and prior month's 51.5. The data showed that China's manufacturing activity is back in expansion mode and would stilly stay there. However, strength of the expansion could be modest only.

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