Dollar Salivating for Euro Troubles or 4Q Earnings to Force BreakWith the global economy slowing, rates fading and financial instability becoming the norm; my medium-term outlook is for a meaningful risk aversion move. Yet, at this point, I would settle for a short-term rally in risk trends. We have lacked any kind of meaningful momentum since before the year began. Giving us a sense of this inactivity, the equity market’s (my passive barometer for market-wide risk) VIX Volatility reading is plunging its lowest level since late July while the currency equivalent is testing comparative lows. This is a measure of future activity. Those measures of current activity are running at similar levels. If we were in fundamental trough or plateau – or even a mixed scenario – this anchoring wouldn’t surprise me. That said, we are not facing balanced conditions. The threat of financial and economic risk is clearly rising (even politicians are admitting to it), and yet we still lack for conviction.
What is needed is a catalyst that draws investors off of the sidelines and encourages them to be active in this market once again. The European downgrades have so far failed to stoke fears of our next global financial crisis taking root (more on that below) and the steady slide in economic activity across various regions has yielded the same. That is the risk side of the balance, so now we will try the ‘return’ side. With Tuesday’s session, we will kick off the 4Q US earnings season in earnest . Will these figures finally return to reality and offer a spark for broader risk?
Euro has Not Dodged a Bullet with Downgrades, French Bond Auction
The Euro has passed the first opportunity to respond to the Standard & Poor’s round of Friday evening rate cuts , and not only has the currency avoided a strong bearish slide – it didn’t move at all. Neither the shared currency nor risk appetite trends made a meaningful move liquidity filled out once again. Should we take this to mean that the downgrades have no influence? Of course not. Less controversial, does this mean that the downgrades themselves were fully priced in? We could argue this point on price action, but the reality of the situation is that the full impact of this change cannot be fully appreciated due to the complexity of how this can further and accelerate the region’s financial crisis. Therefore, the rate cut to France itself may have been adjusted for, but its influence in undermining the region’s safe haven options, unnerving regional banks and diverting capital flow won’t be known until it is already behind us.
Far more influential in the rating agency’s offensive is the continued degradation of those members that are already on the cusp. Now rated ‘junk’ status, Portugal has seen its 10-year bond yield soar over 225 basis points. This brings up a serious concern of whether another member that is tapping the bailout program could follow down the same path as Greece. More certain in its influence over the region, both Spain and Italy didn’t see significant impact on their respective yields on the day, but the rating hit no doubt weighs the market’s confidence. Spain will find a vote of confidence in bond auctions tomorrow (on 12 and 18 month maturities – short-term usually has less risk). Also of note, we have Greek and EFSF bond auctions. The later will be particularly interesting after the S&P downgraded its ‘AAA’ rating Monday . This didn’t strike the market as much of a surprise however as it was warned well in advance that should France lose its top rating, so too would the bailout program.
Japanese Yen: Noda Warns Japan Cannot Abide Rates Above 3 PercentWhen a currency stands in as a safe haven, it can override a significant number of fundamental concerns . So it is with the Japanese yen. The Japanese markets offer the kind of liquidity and financial structure that resembles the United States’ roll – just in the Asian sector. However, the country never really solved its credit issues of two decades ago and their currency is severely undermining economic activity in the region. Prime Minister Noda warned Monday (it’s an issue if your leader voices it) that they must reign in debts as they can’t absorb even 3 percent rates.
Canadian Dollar Response to BoC Decision Depends on Expectations
What should we expect from the Bank of Canada rate decision in the upcoming session? There may very well be higher expectation for volatility in reaction to this release as the speculative ranks are riding high off their RBA expectations. However, the market and economists are pricing in little to no chance of a move over the coming 12 months (much less this particular meeting). That said, the group has held a dovish tone for months – generally ignored by the market. If they threaten action to that outlook, we have a good risk aversion amplifier to work with.
British Pound Will Try to Look for Separation from Euro with CPI Data
The sterling is still following the track that the euro has laid out for it. Chancellor of the Exchequer reminded us of the two currencies’ fundamental connection when he warned that the Euro Zone’s crisis is “extremely challenging” for the UK (our skepticism should curb the attention we pay to his optimism surrounding certain, recent indicator releases). If the crisis intensifies in the Euro-area, it will certainly spill over to Britain. That said, if we can hold on to quiet markets, perhaps the upcoming CPI data can provide a small, temporary separation.
Australian Dollar Advances before Chinese GDP, Data Impact Reserved
The issue with quiet markets is that the impact from data will be muted whether it releases to the bullish or bearish side. As the most risk attuned commodity currency and an important raw material provider for China, there was an expectation that the Asian giant’s 4Q GDP figures could generate substantial volatility for the Aussie. However, a pick up from a quiet level is still quiet. The economy expanded 2.0 percent on the quarter and a greater than expected 8.9 percent on an annual basis. It’s still a cooling trend, just not at the pace that can spark fear.
Gold Slowly Advances as European Financial Health Deteriorates
While the euro and risk trends remain sedate in the aftermath of the Euro Zone downgrades, there is still a sense of risk aversion related to the development. The currency holds steady as capital circulates to other European members while sensitive assets (like equities) find ill-earned confidence in the promises of stimulus from policy bodies. Nevertheless, the slide into recession and the low firepower for monetary policy officials as their balance sheets balloon aren’t going unnoticed. In this troubled mix, capital will find its way to the non-currency metal.
Next 24 Hours
|2:00||CNY||Real GDP (YoY) (4Q)||8.7%||9.1%||Expectations are that Chinese growth will be the slowest since 2009|
|2:00||CNY||Real GDP (QoQ) (4Q)||2.3%|
|2:00||CNY||Real GDP YTD (YoY) (4Q)||9.2%||9.4%|
|2:00||CNY||Industrial Production YTD (YoY)||13.8%||14.0%|
|2:00||CNY||Industrial Production (YoY)||12.3%||12.4%|
|2:00||CNY||Fixed Assets Inv Excl. Rural YTD (YoY) (DEC)||24.1%||24.5%|
|2:00||CNY||Retail Sales YTD (YoY) (DEC)||17.0%||17.0%|
|2:00||CNY||Retail Sales (YoY) (DEC)||17.2%||17.3%|
|09:30||GBP||CPI (MoM) (DEC)||0.4%||0.2%||UK inflation continues to show signs of easing on austerity and subdued activity, data unlikely to alter BoE’s dovish stance|
|09:30||GBP||CPI (YoY) (DEC)||4.2%||4.8%|
|09:30||GBP||Core CPI (YoY) (DEC)||3.0%||3.2%|
|09:30||GBP||Retail Price Index (DEC)||239.1||238.5|
|09:30||GBP||RPI (MoM) (DEC)||0.3%||0.2%|
|09:30||GBP||RPI (YoY) (DEC)||4.7%||5.2%|
|10:00||EUR||Euro-Zone CPI - Core (YoY) (DEC)||1.6%||1.6%||Expected to ease amid threat of recession in Eurozone|
|10:00||EUR||Euro-Zone CPI (MoM) (DEC)||0.4%||0.1%|
|10:00||EUR||Euro-Zone CPI (YoY) (DEC)||2.8%||3.0%|
|10:00||EUR||ZEW Survey (German Current Situation) (JAN)||24||26.8||Data could provide insight into whether Germany slips into recession|
|10:00||EUR||ZEW Survey (Eurozone Econ. Sentiment) (JAN)||-54.1|
|10:00||EUR||ZEW Survey (German Econ. Sentiment) (JAN)||-49.4||-53.8|
|13:30||CAD||Int'l Securities Transactions (NOV)||2.03B|
|13:30||USD||Empire State Manufacturing (JAN)||11||9.53||Expected to reflect the overall positive direction of US economic indicators|
|14:00||CAD||Bank of Canada Rate Decision||1.00%||1.00%||No change expected as Canadian economy confronts challenges ranging from uncertain growth outlook to unstable labor market|
|23:30||AUD||Westpac Consumer Confidence s.a. (MoM) (JAN)||-8.3%|
|23:30||AUD||Westpac Consumer Confidence Index (JAN)||94.7|
|GMT||Currency||Upcoming Events & Speeches|
|9:00||EUR||French Finance Minister Baroin Speaks to the Press|
|9:30||EUR||Spain Bond Auction (364- and 518-Day Bills)|
|10:00||EUR||Greece Bond Auction|
|10:00||GBP||BoE’s King, Haldane, Cohrs, and Jenkins Speak in London|
|11:00||EUR||EFSF Bond Auctions (182-Day Bills)|
|12:30||EUR||EU’s Van Rompuy Meets Spanish Prime Minister Rajoy in Madrid|
|17:30||EUR||EU’s Almunia Speaks in Brussels|
|18:30||GBP||BoE’s Posen Speaks in London|
|23:00||EUR||Italy’s Monti Speaks in London|