The bank holiday in the US limited market movements yesterday, with most pairs remaining happily within spitting distance of where they spent Friday evening. Overnight movements have seen some broadly positive moves for some currencies though.
NZD has long been one of our favourite currencies and continued its strong start to the year overnight following strong inflation data. CPI rose by 1.6% in Q4, the fastest pace since 2012, and has increased expectations that the RBNZ will be the first G10 bank to raise rates this year. Swap markets put the probability of a rate rise at the Bank’s meeting at 63%. Recent data from New Zealand would seem to warrant a tightening of monetary policy but there is the possibility that, like other higher-beta currency controlling central banks, the recent NZD strength will preclude the central bank from further encouraging investment into it. The meeting takes place on Jan 30th.
One currency not finding strength into its central bank’s meeting is the Japanese yen. Readers of our 2014 Global Outlook will know that we have pinned a target of pretty extreme weakening on the Japanese yen this year on the basis of a failing inflation target, pernicious sales tax and a subsequent resumption of massive stimulus. The sales tax increase on April 1st is expected to hammer growth just as the Japanese economy showed some form of life following Abe’s and Kuroda’s stimulatory 2013. Yen is down 0.45% against the USD and 0.6% against the pound as traders bet that the 2 day meeting will end in further dovish language from the Bank of Japan.
Sterling didn’t move too much higher yesterday following rumours that the IMF would upgrade its estimate of UK growth at its press conference later today. Originally broken by Sky News and reported in most papers this morning, this would be encouraging news if it made a difference. We have to remember that this is the same IMF that warned of a need for a lessening of budget cuts as Osborne was ‘playing with fire’. This is a classic example of the phrase “the only function of economic forecasting is to make astrology look respectable”. In any case, we would admit that growth estimates are expected to rise certainly, but it is the sustainability of that recovery, still heavily focused on consumers and debt driven housing expansion, that is the issue.
The main structural data from the world economy will come from the German economy with the publication of the latest ZEW reading of German growth expectations due at 10am GMT. The market is looking for a rise to 64.0 from the 62.0 previously which would be the highest level in 8 years. Canadian data later on in the day may further heap pressure on the loonie before tomorrow’s Bank of Canada meeting. Manufacturing confidence has slipped in Canada recently and lower sales from the sector could easily be seen through November and December; CAD is on the back foot before the central bank meeting tomorrow afternoon at 3pm GMT.
