FX Update: Can this downbeat market find anything to cheer about?
Market comment
Risk remained under plenty of pressure overnight and as we head into the North American session today. A minor consolidation was followed up with new lows in equities this morning. The USD was a tad weaker before firming again. USDJPY edged through the big 90.00 level before deciding it wasn't quite ready to take out that level on its first try. The market is trying to sort through the implications of the Obama administration's recent proposals to rearrange the US financial industry to prevent the kind of systemic risks that triggered the meltdown. At the crux of the plan is a complete separation of proprietary trading, including investments in real estate, in house hedge funds, private equity, etc... An article in Bloomberg today points out that all of the Q4 increase in overall Q4 earnings was expected to come from the financial sector - so this is a clearly negative for the short term for equities. Other entities don't have access to the virtually free money that is offer from the Fed for investing as banks do under current rules, so the planned changes would mean a very different financial environment down the road if they come to pass.
Bernanke's confirmation - not a formality?
An article in the Wall Street Journal today reminds us that Bernanke's first term as Fed chairman runs out at the end of this month and that he faces a confirmation vote in the Senate some time next week or the following week. He will need 60 of the 100 Senators to approve his renomination. One wonders if some politicians might see a no vote as potential political equity down the road: if the economy (more important, "when" in our view) sours again, they can point back to their no votes and try to shift as much of the blame as possible on to the Fed's shoulders. Meanwhile, a yes vote offers no such potential. The Journal article suggests that Bernanke could receive as few as 69 votes if senators vote in the same proportion as the Senate Banking Committee voted in favor of a reappointment last month. At least one anti-Bernanke senator believes he might be able to muster enough Republican votes to make . It seems the odds of Mr. Bernanke not finding reappointment are low, but the issue bears watching, as the implications of a rejection of his reappointment would be monumental.
UK and Canadian Retail Sales
Sterling finally consolidated today - but apparently as much on flow rumors as on the very weak UK Retail Sales results for December. (most prefer to look elsewhere for a better understanding of the performance of the UK retail sector as this survey has had its problems in the past.) Canadian November Retail sales were even weaker, registering no gain at all less Autos. This survey arrives later, however, than other retail sales surveys from around the world, so the focus for CAD is likely to remain on whether oil prices continue to tumble, as well as the risk appetite. It appears that the Russian central bank is finished buying the loonie at the top of the range….
Chart: EURJPY
Interesting to note EURJPY on the weekly close today. This would be the lowest weekly close since the week of the equity market low in March. It is also the first weekly close below the 55-week moving average since back in July. Still, we have the last vestiges of range support in place around 127.00.
China seeks to reassure market
The recent Chinese announcement of further restrictions on the flow of credit was one of the key initial sparks to this recent wave of risk aversion, and PBOC governor Xiaochuan promised that the bank would focus on flexibility, supporting economic growth, and controlling inflation expectations. This seemed to reassure Chinese markets on Friday, as the day ended slightly positive after a chunky, intraday sell-off. It also kept AUD from falling into the abyss, though the fate of that currency still rests in the hands of risk appetite elsewhere, too.
Looking ahead
We're at another major threshold as we look toward the weekend - namely at 90 in USDJPY. A weak Yen proponent (Kan) is now at the helm in Japan and this is perhaps a first major test of his resolve and the market’s willingness to challenge that resolve. We would look for USDJPY to find support in coming sessions - but will that support be found here and now or not until we see a bigger capitulation? USDJPY will be an interesting one to watch.
If the rest of world markets follow the Chinese equity market performance, we could see risk seekers trying to make a stand today, though the US market has an awfully big issue to chew on with the recent initiatives to rearrange the financial sector and we suspect that for the short term, risk rallies could be fleeting.
Next week’s economic calendar is an eventful one, with the BoJ, RBNZ and Fed all on tap, the German IFO, and the first look at US Q4 GDP (estimated at a whopping 4.5%) and plenty more.
Economic Data Highlights
- Australia Q4 Export Price Index fell -1.7% QoQ vs. -3.5% expected and -9.6% in Q3
- Australia Q4 Import Price Index fell -4.3% QoQ vs. -2.0% expected and -3.0% in Q3
- Japan Dec. Nationwide Department Store Sales fell -5.0% YoY vs. -8.0% in Nov.
- UK Dec. Retail Sales rose +0.3% MoM and 2.1% YoY vs. 1.1/3.0% expected, respectively
- EuroZone Nov. Industrial New Orders rose +1.6% MoM and fell -1.5% YoY vs. +0.5/-7.1% expected, respectively and vs. -14.4% YoY in Oct.
- Canada Nov. Retail Sales out at -0.3% MoM and less Autos at 0.0% vs. -0.2/+0.5% expected, respectively
Upcoming Economic Calendar Highlights
- Australia Q4 Producer Price Index (Mon 0030)
- Japan BoJ Monetary Policy Meeting (Mon 0400)