The markets ended last week in what looked like an attempt at establishing a Goldilocks scenario: with US data neither too hot nor too cold (weak ISM Manufacturing but reasonably strong ISM non-manufacturing, weak non-farm payrolls, but strong household survey/unemployment rate drop). In the market’s thinking, this will mean a Fed response that will do as little as possible to upset the market’s apple cart: sure, the taper will continue for the foreseeable future, but the Fed is going to keep its hand away from the interest rate lever for even longer than previously anticipated. This can be seen in Friday’s response to the US employment report, when both risky assets and US treasuries (particularly of short-to-mid duration) rallied strongly.
In currencies, this meant a mixed USD response — EURUSD was higher after the European Central Bank (ECB) failed to signal anything new on policy, but USDJPY was back higher on the risk-on response in asset markets (though this morning, it is back to approximately unchanged from the levels ahead of the US jobs report). Elsewhere, the commodity currencies haven’t been able to maintain feeble rally attempts late Friday, which looks promising for the bears that are looking to renew their selling. USDCAD was unable to push below 1.10 despite the very strong Canadian jobs report which should likewise embolden CAD sellers.
For what it’s worth, I don’t buy the Goldilocks scenario — there are too many uncertainties from here — both in emerging markets and especially China, not to mention the trajectory of the EU and the ongoing question of whether there really is an exit strategy for the Fed after another round or two of tapering.
News bits
In Japan, it was interesting to note yet another drop in consumer confidence to close to the levels before the introduction of Abenomics, a sign that Prime Minister Shinzo Abe is fast running out of political capital to expend on further reforms.
Japan’s current account situation continues to deteriorate as the adjusted data showed a new record low and more than a disappointment as the cost side of imports seems to be vastly outweighing any boost to exports from Bank of Japan policy.
Looking ahead
This week’s chief focus is of course on Janet Yellen’s semi-annual testimony before the House on Tuesday and the Senate on Wednesday as the markets must get accustomed to a new Fed chair’s way of speaking (her accent and delivery certainly take some getting used to and don’t exactly inspire confidence in this analyst). Particularly interesting will be how she will defend quantitative easing and Fed policy before what is likely to be an increasingly hostile Republican contingent this year ahead of the mid-term elections in November. The baseline expectation here is for relative dovishness, but the taper will continue.
I suspect EURUSD will top out this week or very soon thereafter — 1.3700 is the first resistance followed by 1.3800 — the pair has had a hard time developing any momentum either up or down for weeks now. USDJPY may be in for at least one more throwback lower. GBPUSD and EURGBP will pivot off Wednesday’s Bank of England inflation report. 1.6500 is an important resistance area for GBPUSD.
Chart: AUDUSD
The commodity currencies haven’t put up much of a fight despite the risk-on close to the week last week The clear resistance for AUDUSD is at 0.9000 here locally. A stronger sign that the highs are in for now would be a strong sell-off back below 0.8825 as we await the next directional signal on this pair this week.
The major US data point of note will be January advance retail sales on Thursday, but any weakness there will be written off, probably justifiably in this case, as weather-related, while any strength would get an asymmetric market response.
Elsewhere, look for the Bank of England (BoE) inflation report on Wednesday, where Governor Carney faces the awkward task of dodging his own “forward guidance” now that the unemployment rate has so rapidly descended to close to the threshold while the BoE is far from ready to move on rates. I was very surprised to see last week’s UK trade balance improvement, as this was one of the major metrics that has me sceptical on the scope of sterling’s ongoing strength, but if it continues to improve, it may get easier to believe in the EURGBP downside argument. It will take several months of data to get a clearer picture there as the UK trade balance data is a volatile data series.
Economic Data Highlights
- New Zealand Jan. QV House Prices rose +9.6 percent YoY vs. +10 percent
- Japan Dec. Adjusted Current Account Balance out at -¥196.7B vs. -¥64B expected and -¥47B in Nov.
- Japan Jan. Consumer Confidence out at 50.6 vs. 42.0 expected and 41.3 in Dec.
- Switzerland Jan. Unemployment Rate out unchanged at 3.2 percent as expected
Upcoming Economic Calendar Highlights (all times GMT)
- Norway Jan. CPI (09:00)
- Canada Jan. Housing Starts (13:15)
- Canada Bank of Canada Deputy Governor Murray to Speak (17:50)
- UK Jan. BRC Sales Like-for-Like (00:01)
- Australia Dec. Home Loans (00:30)
- Australia Jan. NAB Business Confidence/Conditions (00:30)
- Australia Q4 House Price Index (00:30)