Tuesday, 8 January 2013
Euro rebounded broadly overnight on building expectations that ECB would keep the policy rate unchanged at 0.75% this week. According to a Reuters poll, 67 out of 73 surveyed economists are expecting ECB to stand pat. Though, forward rate contracts are still pricing in a 25bos cut by then end of June. It's perceived that while ECB has indicated the openness to a rate cut, the decision will largely depend on the willingness of core Eurozone countries. Germany CPI rose more than expected to 2.1% yoy back in December while Eurozone CPI also continued to stay above ECB's target and was at 2.2% yoy. The stubborn inflation reading would probably tie up ECB's hands for cutting rates in Q1.
Monday, 7 January 2013
Financial markets are steady in Asia today without much reaction to the solid employment report from US over the week. Major pairs and crosses in FX markets are stuck in right range as dollar retreats while yen recovers. Sentiments were supported by news that the Basel Committee for Banking Supervision has watered down the Basel asset rule and put back implementation. Major change is in the so called Liquidity Coverage Ratio, or LCR, which requires banks to hold liquid assets to cover all expected outflows over a 30-day period. And, the original deadline was 2015. Now, banks are only required to keep a ratio of 60% in 2015 with the full deadline pushed further to 2019. More importantly, Banks could use certain collateral to cover up to 15% of their LCR. It believed that the chance is aiming at giving banks the space to finance recovery in the global economy.
Friday, 4 January 2013
Dollar strengthened sharply overnight as FOMC minutes showed that most policy makers saw quantitative easing ending in 2013. The minutes noted that "a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013". Meanwhile, "several others thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet." Nonetheless, the announcement of additional easing back in December was justified as "without further policy accommodation, economic growth might not be strong enough to generate sustained improvements in labor market conditions. The development in major dollar pairs are starting to argue that the post fiscal cliff selloff in dollar was just a knee jerk reaction. EUR/USD is heading back towards 1.3 psychological level. Indeed, GBP/USD's break of 1.6066 support indicates that earlier break of 1.63 was a bull trap. Though, the weakness in the Japanese yen remains clear for the moment.
Thursday, 3 January 2013
Euro is notably weaker than other major currencies except the Japanese yen and Swiss Franc even though the markets are generally blessed with risk appetite. Indeed, EUR/USD failed to take out 1.33 level yesterday and is now back trading at around 1.31 at the time of writing. A key factor of Euro's weakness is the worries on growth, in particular after a string of business sentiments data showed risk on continuing recession in Q4, which would extend to Q1. Also, the supposed strongest economies in Germany and France aren't immune. And there are talks that ECB could be forced to take additional easing measures in 2013 to boost growth. And indeed, judging from the price actions, Euro could be somewhat viewed as a funding currency for carry trade for higher yield currencies.
Wednesday, 2 January 2013
Markets open 2013 trading with strong risk appetite on breakthrough in US fiscal cliff negotiations. Yen and, to a slightly lesser, extent, dollar, are broadly sold-off in steep manner. A bit different from what happened around the end of last year, all major currencies participates in the rally including both European majors and commodity currencies. Senate has already passed a compromised deal, which excluded spending cuts, by 89-9. House is expected to vote on the bill that would eventually avert that automatic tax increase for most Americans that costs up to $600b and would eventually drag US and the world back into recession. At the time of writing, House has just pass the Senate bill by 257-167. The Congress approved bill will then go to President Obama for final seal off.