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#Post#: 208--------------------------------------------------
Sterling and Yen Slip Lower, Euro Stuck in Week's Narrow Range
By: fxvictory Date: November 14, 2014, 6:44 am
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The main theme this week has been the heavy tone of both
sterling and the yen. The yen's weakness stems from the
aggressive easing by the BOJ and the stepped up buying of
foreign assets by Japanese investors. The story that has emerged
this week is that Prime Minister Abe is expected to decide
shortly after Q3 GDP is reported at the start of next week that
the economy is too weak to sustain the planned hike in the sales
tax next year. Such a decision may help bolster Abe's public
support, and he is expected to use to dissolve the lower house
and call for snap elections that will likely be held next month.
A postponement of the sales tax increase for around 18 months is
understood by investors to be another fillip for equities. The
Nikkei advanced 3.6% this week, easily the best performer among
the major markets. That said, it is noteworthy that the US S&P
500 has outperformed the Nikkei so far this year 10.3% to 7.3%.
Nevertheless, the rise in the Nikkei is associated with a weaker
yen. The yen lost 1.5% this week, coming into the North American
session, which brings the year-to-date loss to 9.5%. The dollar
is posting new multi-year highs against the yen, near JPY116.40.
A weekly close above JPY116 will likely encourage a move to
JPY118 on the way to JPY120, likely to be seen before the end of
the year.
Sterling has been trending lower since peaking four months ago.
We have noted how well sterling has been tracking the shift in
interest rate expectations. This was driven home this week by
the Bank of England's Quarterly Inflation Report, which warned
of the risk that UK inflation falls below 1% in the next six
months. Even though the BOE's longer-term inflation outlook was
largely unchanged, the market was guided into pushing out rate
hike expectations into late 2015. The implied yield of the
December 2015 short-sterling futures contract has slipped 12 bp
this week to below 1.00%.
Today's slippage was encouraged by a softer than expected
September construction spending report. Economists had expected
the 3.0% decline in August to have been completely offset by the
rise in September. However, the report showed September only
managed to recoup about half the loss (1.8% vs. -3.0%). Sterling
has fallen to new 14-month lows today and tested the $1.5650
level. The next immediate target is $1.55.
For its part, the euro has traded quietly this week, stuck in a
little more than a one cent range ($1.2395-$1.2510). Today's
preliminary release of Q3 GDP figures have contained some minor
surprises but provided little in the way of fresh trading
incentives. The eurozone economy expanded by 0.2% in Q3. To say
this was double the pace the consensus forecast does not do it
justice. Second quarter growth was revised to 0.1% from a flat
report initially. This lifted the year-over-year pace to 0.8%,
where it remained in Q3.
German and Italian GDP was in line with expectations. The German
economy grow 0.1% for a 1.0% year--over-year pace. Italy
contracted by 0.1% on the quarter and 0.4% on the year. The
Dutch economy disappointed with a 0.2% expansion, which was a
step down from the 0.5% Q2 GDP.
It was the French report that offered the best surprise. The
economy grew by 0.3%. The consensus had forecast a 0.1%
expansion. The positive news was tempered by the downward
revision to Q2 from flat to -0.1%. Still, the year-over-year
rate rose to 0.4% from flat.
Expectations that the ECB will be taking new initiatives to
combat the risk of deflation and spur lending in the regions,
coupled with the Swiss gold referendum later this month has seen
the euro edge toward the SNB’s floor near CHF1.20. The SNB has
reiterated its commitment to defending it.
After a dearth of top tier data, the US finishes the week with
October retail sales. A bounce back is expected (~0.2%) after a
weak September report (-0.3%). From a GDP perspective, the most
important part of the report excludes autos, gasoline and
building materials. This core measure is expected to rise 0.4%
after falling by 0.2%. Yet it is remarkable how steady this
measure has been, leaving aside this apparent volatility. The
6-, 12- and 24-month average is 0.26%-0.27%. The other important
element here is that American consumption is not being fueled by
credit. Revolving credit (credit cards) has been mostly flat
this year. The increase in household credit has been for auto
and student loans.
The US also report import prices, which will be dragged down by
the slide in oil prices. That drop in oil prices translates into
falling gasoline prices, and that coupled with a rising stock
market can be expected to buoy consumer sentiment. The
University of Michigan consumer confidence survey also contains
inflation expectations, which appear to be holding up better
than some market-based measures like the breakevens (TIPS vs.
conventional Treasuries). Today’s session also features St.
Louis Fed’s Bullard speaking on the US economy, and a Fed/ECB
conference in Washington that includes Fischer, Powell and
Coeure.
__________________ :D
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