The USD ended the week as the strongest currency with the boost some a string of solid economic data, in particular the job data released on Friday. The dollar index extended recent up trend to as high as 89.46, hitting a five year high, before closing at 89.35. Stocks were also lifted with DJIA and S&P 500 both ended at record high of 17958.79 and 2075.34 respectively. Strength was more apparent in DJIA than S&P 500. Gold had some attempt on 1200 handle but closed below at 1192.6. Crude oil took at breath after dipping to 63.72. In the currency markets, Yen crosses continued to defy gravity as selloff in the Japanese currency continued, and it ended as the weakest one. Aussie and Kiwi followed closely. While Euro attempted for a recovery on less dovish than expected ECB press conference, it remained the weakest one among European majors.
To recap some of the events, US non-farm payroll grew 321k in November versus expectation of 225k. That's the highest number since January 2012. Prior month's figure was also revised up from 214k to 243k. Unemployment rate was unchanged at 5.80% as widely expected. ISM services jumped to 59.3 in November versus consensus of 57.5. ISM manufacturing index dropped to 58.7 in November, better than expectation of 58.0.
ECB president Mario Draghi noted that the central bank discussed "possibility of doing QE”, that is, government bond purchases, "as one option". But he also emphasized that more time is needed to gauge the effect of prior stimulus and the need for additional easing. He noted that ECB will reassess the policies early next year and "it doesn't mean at the next meeting". ECB also released latest staff projections. GDP was forecast to grow 0.8% in 2014, 1.0% in 2015 and 1.5% in 2016. That was substantially lower than September projections of 0.9% in 2014, 1.6% in 2015 and 1.9% in 2016. Inflation is projected to be 0.5% in 2014, 0.7% in 2015, 1.3% in 2016. That compared to September projections of 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016. It should also be noted that Draghi remarked that the projection didn't take into account recent fall in Crude Oil prices.
BoE kept the bank rate unchanged at 0.50% and maintained the asset purchase target at GBP 375 as widely expected. Only a brief statement was released and focus will turn to minutes to be published on December 17. The Office for Budget Responsibility revised UK's grow projection to 3% this year, up from previous forecast of 2.7%. 2015 growth forecast was revised up from 2.3% to 2.4%. However, afterwards, growth projections were revised down from 2.6% to 2.2% in 2016 and from 2.6% to 2.4% in 2017. Inflation projection for was revised "significantly" down to 1.5% in 2014, 1.2% in 2015, and 1.7% in 2016. That compared to prior projections of 1.9%, 2.0% and 2.0% respectively.
Moody's downgraded Japan's government debt rating by one notch from A1 to Aa3. The rating agency said that the key drivers of the decision were "heightened uncertainty over the achievability of fiscal deficit reduction goals", "uncertainty over the timing and effectiveness of growth enhancing policy measures, against a background of deflationary pressures", and "increased risk of rising JGB yields and reduced debt affordability over the medium term." Meanwhile, it said the rating action did not affect the Aaa foreign currency rating.
RBA left the cash rate unchanged at 2.50% as widely expected. The central bank reiterated in the statement that "the most prudent course is likely to be a period of stability in interest rates." Other parts of the statement were generally unchanged from the prior one. RBA noted that the economy will continue with with moderate growth. Spare capacity in the labor market will limit wage growth over the period ahead and keep inflation consistent with target. Aussie's exchange is seen as above fundamental value in spite of recent deprecation. Globally, RBA saw weakness in Eurozone and Japan economy and the difference in monetary policies of major central banks would affect exchange rate markets. Australia Q3 GDP grew 0.3% qoq versus expectation of 0.7% qoq and slowed from Q2's 0.5% qoq.
BoC left interest rate unchanged at 1.00% as widely expected and noted in the statement that "the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun." Meanwhile it also said that, "weaker oil prices pose an important downside risk to the inflation profile", which was "tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures." Overall, " the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent."
Regarding trading strategies, we bought USD/CAD on late break of 1.1466 and bought EUR/AUD on break of 1.4704 last week. While momentum has been rather unconvincing in both pairs, we'll hold on to the long positions first. Nonetheless tight stop would be deployed at 1.13 in USD/CAD and 1.46 in EUR/AUD. The broad based selloff in yen, in particular, USD/JPY's strong break of 120 suggests that the down trend in yen is resuming. Thus, we'll buy USD/JPY this week for next key resistance level at 124.13.