Currencies Churn, Awaiting New Incentives

A consolidative tone threatening to emerging in the foreign exchange market, as prices churn awaiting not only today's press conference following the ECB meeting, but also tomorrow's US employment data and prospects for an expansion of QE3+ at next week's FOMC meeting. 

Five major central banks were to meet this week, with only the Reserve Bank of Australia poised to act.  They did cut rates, but the accompanying statement did not tip the hand of the next move.  The market took advantage of the jobs data's favorable optics to reduce the likelihood of a follow up cut in February to about 50/50.  

The details of the employment report were really weaker than it appeared.  The 13.9k increase in jobs is misleading as it was driven exclusively by part-time jobs.  Full time work actually fell 4.2k, the first decline in four months.  The unexpected decline in the unemployment rate to 5.2% from 5.4% in Sept and Oct was a function of a decline in the participation rate.  The Australian dollar has traded now (barely) on both sides of yesterday's range.  Offers in the $1.05 area continue to slow the Aussie's ascent.

The central bank of Canada met on Tuesday and left rates steady, though the Bank was reluctant to completely give up is slightly hawkish rhetoric.  The same can be said about the Reserve Bank of New Zealand:  rates on hold, with somewhat hawkish comments.  Today's BOE meeting is largely a none-event.  Nor is the ECB expected to do anything.  Draghi's press conference and staff forecasts will be the focus.  

The US dollar has rebounded smartly off yesterday's low against the yen near JPY81.80 to briefly trade above JPY82.60 today, hitting a downtrend line drawn off the ~JPY82.84 high for the move recorded on November 22 and the secondary high near JPY82.75 on November 30.  The ostensible driver was local press reports that suggest the LDP may secure an outright majority at the December 16th election. Abe continues to press for a change in the BOJ law, which an aide said could take place by July.  We have noted that Abe will b able to achieve similar results by being able to appoint a new governor and deputies early next year.  Support now for the dollar is seen near JPY82.30,  Separately we note that the weekly MOF portfolio flows show continued foreign interest in Japanese shares, but the prospects of further yen weakness may have encouraged Japanese investors to keep more money at home, selling foreign bonds and stocks.  Japan recorded a net inflow of portfolio capital to the tune of JPY2.12 trillion compared with an outflow of JPY1.37 trillion in the previous week.  

Turning to Europe, sterling has remained relatively firm in the aftermath of the Osborne's Autumn Statement.  The post-mortem suggests that a bullet was dodged by a couple of accounting tricks, including counting as revenue proceeds from the 4G auction that has not been held and the transfer of funds from the BOE's QE.  Although the Chancellor stuck to his austerity message, the risk of a downgrade (with Fitch seen as the most likely candidate) has not diminished.   

The poor growth prospects were highlighted today by the Oct trade report that showed an increasing drag by the external sector.  The GBP9.5 bln trade deficit was more than 10% larger than the GBP8.4  bln shortfall recorded in September.  A little more than half of the deterioration was accounted for by non-EU trade partners.  Separately, and perhaps another source of pressure on the UK gilts was news of a much larger than expected rise in the Halifax house price index.  The 1.0% rise in November contrasts with the Bloomberg consensus of a 0.1% rise.  Moreover, the Oct series was revised to show a 0.1% decline rather than a 0.7% decline as initially reported.  

The Swiss franc has been in play following the decision by a large local bank to charge for substantial franc deposits.  It is not the first bank to do so, yet it prompted a more dramatic reaction than when a couple of foreign banks made similar announcements.  We remain skeptical that it signals central bank action along the similar vein.  Nevertheless, poor data from Switzerland today has played on such fears and has seen the franc give up a good part of yesterday's recovery gains.  Unemployment in ticked up to 3.1% from 2.9% in October, but the real blow came from the CPI figures.  The November CPI fell 0.3% on the month and 0.4% from a year ago.  The market had anticipated flat readings.  

Meanwhile, news from the euro zone itself has been somewhat favorable.  We note that tomorrow is the deadline for participation in the Greek bond buy back.  The bond buy back triggered S&P's selective default rating, which seemed to have weighed on the euro initially.  Talk suggests that local banks (which have rallied strongly today ~4%, which is twice the gain of the overall market) and some hedge funds will participate and will increase the likelihood of success.  Separately, France saw good demand and lower rates at the first bond auction since its downgrade.  Germany reported significantly better than expected October factory orders.  The 3.9% increase compares to the consensus expectation for a 1% gain.  The Sept data was revised to show a 2.4% decline rather than 3.3%.  Lastly, despite the  walk-out by Berlusconi's center-right PDL, Italy's Monti survived a vote of confidence in the Senate over new growth measures.