The Euro has bashed to new recent highs across the board ahead of the ECB’s LTRO repayment announcement later this morning. This could serve as a pivot point for the single currency if the announcement has been over-anticipated.
All eyes on the LTRO announcement
Around 1100 GMT today, we should expect the ECB to announce the size of the first repayments of the 3-year LTRO’s that were issued since December of 2011. Speculation surrounding the LTRO repayments has been added on top of the general reduction in EU tail risks (and reflects that reduction in a way as it is a way for banks to say – that’s OK, ECB, we don’t need as many injections now) as a repayment almost equates with “quantitative tightening” in a global environment of wild money printing in Japan and the US. There are various estimates of the size of the repayments, with the bigger the repayment, the supposedly more bullish for the Euro – but at this point, what is the surprise potential to a known event risk? I suspect those in the know have already made their round trip trades on this. The consensus for the repayment size are in the 100 billion Euro range, but it is clear that the market is gunning for a big number. Could we, in the short term at least, have a sell-the-fact setup here, almost regardless of the amount?
Japan CPI
Japan’s CPI was out showing the kind of mild deflation we’ve come to expect in the country, with the year-on-year core rate of -0.6%, slightly more deflationary than expected. This was for December data, however, when the JPY weakening move was just hitting its stride and it takes some time for the effects of a weaker currency to filter their way through the economy. The January core Tokyo CPI, however was actually at -0.9%, so this shows how much heavy lifting officialdom will have to do to move the needle on the dial. The market seemed to take this data as a sign that the government is going to get ever more radical in moving to bring back inflation.
JPY the most UNDER-valued currency among the G10?
As I squawked earlier, Bloomberg was out with a great article discussing the Big Mac Index, which refutes Abe’s claims that the JPY is overvalued (http://www.bloomberg.com/news/2013-01-25/big-mac-index-cooks-abe-s-claim-yen-still-too-strong-currencies.html) . Remember, that in a nation with steady deflation, the currency unit actually gains value over time while in a country with higher inflation, that unit. So all things being equal, if Country A has -0.5% deflation for 10 years and Country B has +2.5% inflation for 10 years, the A/B exchange rate should advance significantly over that time period (even if an investor is compensated with carry – the interest rate differential between the two currencies would presumably be fairly significant). So consider that Japan has had slight deflation for the last 10 years while Australia, for example, has averaged maybe 2.5%. The AUD/JPY exchange rate on Jan 25, 2003 was about 70. Today, it is pushing 95. Hmm...
There is something increasingly unstable about this JPY move, I suspect. It will either revert soon to a choppy and large range or it will keep spiking and end in a spectacular crash. But make no doubt, this move is financially and politically destabilizing and our warning lights should be flashing red by now.
Looking ahead
Today is all about how the market digests the LTRO news and whether this triggers a pivot in the Euro move (especially as we’ve just crossed to new . Looking at the EURJPY move, we can expect very strong wording very soon from Germany as the Toyota/BMW price ratio has been moved a whopping 25% since last summer when EURJPY was trading under 100.
The German IFO number saw a decent 2 point improvement in January, but this survey often leads the equity market, and it is still very low compared to the soaring DAX. Still looks like a dead cat bounce from where I am sitting until proven otherwise.
The AUD and CAD are under severe pressure and are simply fascinating with the S&P500 touching 1500 yesterday. Times they are a-changing in FX – and it’s invigorating.
Then we’re on to next Wednesday’s FOMC meeting. More on that early next week.
Economic Data Highlights
Japan Dec. National CPI out at -0.1% YoY and -0.6% ex Fresh Food and Energy, vs. -0.2%/-0.5% expected, respectively and vs. -0.5% ex Fresh Food and Energy in Nov.
Germany Jan. IFO Survey out at 104.2 vs. 103.0 expected and 102.4 in Dec.
Upcoming Economic Calendar Highlights (all times GMT)
All eyes on the LTRO announcement
Around 1100 GMT today, we should expect the ECB to announce the size of the first repayments of the 3-year LTRO’s that were issued since December of 2011. Speculation surrounding the LTRO repayments has been added on top of the general reduction in EU tail risks (and reflects that reduction in a way as it is a way for banks to say – that’s OK, ECB, we don’t need as many injections now) as a repayment almost equates with “quantitative tightening” in a global environment of wild money printing in Japan and the US. There are various estimates of the size of the repayments, with the bigger the repayment, the supposedly more bullish for the Euro – but at this point, what is the surprise potential to a known event risk? I suspect those in the know have already made their round trip trades on this. The consensus for the repayment size are in the 100 billion Euro range, but it is clear that the market is gunning for a big number. Could we, in the short term at least, have a sell-the-fact setup here, almost regardless of the amount?
Japan CPI
Japan’s CPI was out showing the kind of mild deflation we’ve come to expect in the country, with the year-on-year core rate of -0.6%, slightly more deflationary than expected. This was for December data, however, when the JPY weakening move was just hitting its stride and it takes some time for the effects of a weaker currency to filter their way through the economy. The January core Tokyo CPI, however was actually at -0.9%, so this shows how much heavy lifting officialdom will have to do to move the needle on the dial. The market seemed to take this data as a sign that the government is going to get ever more radical in moving to bring back inflation.
JPY the most UNDER-valued currency among the G10?
As I squawked earlier, Bloomberg was out with a great article discussing the Big Mac Index, which refutes Abe’s claims that the JPY is overvalued (http://www.bloomberg.com/news/2013-01-25/big-mac-index-cooks-abe-s-claim-yen-still-too-strong-currencies.html) . Remember, that in a nation with steady deflation, the currency unit actually gains value over time while in a country with higher inflation, that unit. So all things being equal, if Country A has -0.5% deflation for 10 years and Country B has +2.5% inflation for 10 years, the A/B exchange rate should advance significantly over that time period (even if an investor is compensated with carry – the interest rate differential between the two currencies would presumably be fairly significant). So consider that Japan has had slight deflation for the last 10 years while Australia, for example, has averaged maybe 2.5%. The AUD/JPY exchange rate on Jan 25, 2003 was about 70. Today, it is pushing 95. Hmm...
There is something increasingly unstable about this JPY move, I suspect. It will either revert soon to a choppy and large range or it will keep spiking and end in a spectacular crash. But make no doubt, this move is financially and politically destabilizing and our warning lights should be flashing red by now.
Looking ahead
Today is all about how the market digests the LTRO news and whether this triggers a pivot in the Euro move (especially as we’ve just crossed to new . Looking at the EURJPY move, we can expect very strong wording very soon from Germany as the Toyota/BMW price ratio has been moved a whopping 25% since last summer when EURJPY was trading under 100.
The German IFO number saw a decent 2 point improvement in January, but this survey often leads the equity market, and it is still very low compared to the soaring DAX. Still looks like a dead cat bounce from where I am sitting until proven otherwise.
The AUD and CAD are under severe pressure and are simply fascinating with the S&P500 touching 1500 yesterday. Times they are a-changing in FX – and it’s invigorating.
Then we’re on to next Wednesday’s FOMC meeting. More on that early next week.
Economic Data Highlights
Japan Dec. National CPI out at -0.1% YoY and -0.6% ex Fresh Food and Energy, vs. -0.2%/-0.5% expected, respectively and vs. -0.5% ex Fresh Food and Energy in Nov.
Germany Jan. IFO Survey out at 104.2 vs. 103.0 expected and 102.4 in Dec.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Q4 GDP (0930)
- Canada Dec. CPI (1330)
- US Dec. New Home Sales (1500)
- New Zealand Dec. Performance of Services Index (2130)
- Japan Dec. Corporate Service Price Index (2350)
- UK Jan. Hometrack Housing Survey (0001)