The market’s reaction to Yellen’s testimony was rather interesting, as there was nothing particularly dovish in the testimony itself relative to market expectations, but the USD failed to find much support even as short-term interest rate futures (STIR) out in mid-2015 ended the day several ticks off recent highs. The most pronounced market reaction was in traditionally risk-on currencies like the AUD, CAD and NZD and the Scandies as well, all of which have rallied against the US dollar. As I said late yesterday, it may be that while the Fed will clearly continue to taper for now, the very clear road ahead in terms of the Fed policy (slow taper, interest rates not to be touched for the foreseeable future, and Yellen underlining the “continuity” in Fed policy from the Bernanke era) allows the market a huge degree of confidence in bidding up risk assets and little reason to believe that the Fed is going to be at the vanguard of central bank tightening.
News
Strong Chinese trade data released overnight (don't forget the bricks of salt we must take them with) helped support the Antipodeans overnight.
The Dallas Fed’s Fisher was out blasting the US government for its “feckless” policies and bemoaned the Fed’s own quantitative easing (QE) policy for its lack of efficacy. One of his most pointed statements: “the most vital organ of our nation’s economy, the middle-income worker, is being eviscerated”. Ouch. Once the Fed’s QE programme has proven a disaster in the years to come, Fisher might be an excellent candidate to replace Yellen.
The US House of Representatives voted to suspend the debt ceiling until March of next year, with no conditions attached, a surprise move, considering the bill was put to vote by House Speaker John Boehner and most of his own party voted against. I would expect the Senate to pass this deal soon as well and we can put off discussing this silly issue for at least another year.
Bank of England Quarterly Inflation Report
I don’t envy Mark Carney’s task today, as the Bank of England governor presents the critical quarterly inflation report that will lay out the bank’s thoughts on the quality of the UK economic recovery and on how the bank deals with its previous forward guidance that has already become a bit of an embarrassment due to its poor forecast on the speed with which the unemployment rate would drop even as inflation has also fallen markedly.
In a normal world, it would be easy for the bank to stress the need for further measures to quash the risks of a housing bubble and suggest that it will raise rates when appropriate, but Carney will be very reluctant to suggest much on the interest rate front except by keeping expectations well out into 2015 because the sterling exchange rate is already a cause for concern and has been cropping up in recent BoE rhetoric. The housing bubble will only be addressed through a macro-prudential approach.
It may be difficult to keep a lid on the GBP in this environment, certainly against the EUR, despite the European Central Bank's (ECB) “pass” at its last meeting, as the market is likely looking forward to some kind of ECB move to ease at one of its coming couple of meetings while the BoE can only discuss how slowly it will remove accommodation. If risk appetite remains healthy here and interest rates head higher, GBPJPY may also see a further rally leg, though I’m very surprised at the lack of USDJPY support from the market action overnight (bonds down and stocks up — normally very supportive of JPY crosses), so I’m a bit cautious on that one.
Chart: EURGBP
EURGBP has bounced twice off the 0.8200 area, but has failed to gain any momentum higher. Today offers a key test for the pair, and looking at the likely relative central bank policy moves in the pipeline, one would think that downside risk outweighs upside risk. We’d certainly need to see a dovish Carney to get a rally beyond the recent highs.
Looking ahead
Yellen will testify again tomorrow, this time before the Senate, and it is doubtful that anything new will crop up in her rhetoric.
Norway’s GDP figures are in focus for today. Tomorrow we have Swedens Riksbank as EURSEK is looking distinctly bearish. If risk appetite remains healthy and the Riksbank talks tough on policy (as it is very concerned on the private debt levels in the Swedish economy), we could see another downdraft in EURSEK and challenge of the 200-day moving average.
Beware of the ECB officials out speaking later today and note that Australia releases its latest employment report overnight.
Economic Data Highlights
- China Jan. Trade Balance out at +$31.86B vs. +$23.45B expected and +$25.64B in Dec.
- Japan Jan. Machine Tool Orders rose +39.6% YoY vs. +28.1% in Dec.
Upcoming Economic Calendar Highlights (all times GMT)
- Switzerland Jan. CPI (08:15)
- Norway Q4 GDP (09:00)
- Euro Zone Dec. Industrial Production (10:00)
- UK Bank of England’s Carney presents Quarterly Inflation Report (10:30)
- Euro Zone ECB’s Praet to Speak (11:10)
- US Fed’s Bullard to Speak (13:45)
- Canada Jan. Teranet/National Bank Home Price Index (14:00)
- Euro Zone ECB President Draghi out Speaking (15:30)
- Euro Zone ECB’s Coeure to Speak (18:30)
- New Zealand Jan. BusinessNZ Manufacturing (21:30)
- Japan Jan. Domestic CGPI (23:50)
- UK Jan. RICS House Price Balance (00:01)
- Australia Jan. Employment Change and Unemployment Rate (00:30)
- Australia RBA’s Debelle to Speak (01:25)