Flattish Consolidation Featured

The potential for turnaround Tuesday is resolving itself into flattish consolidation in the foreign exchange market.  The light news stream is also denying participants of fresh trading incentives.  The strongest of the major currencies today, the yen, Australian dollar and British pound have been the weakest in recent sessions.  The week's big events, including the FOMC meeting, European PMIs, and the US jobs report still lie ahead.  

Although there has been some criticism of Japanese efforts to weaken the yen, news wire accounts suggest that the G20 are unlikely to come down very hard on the Abe government or claim that it is engaged in competitive devaluation.  Japanese officials have come under criticism for not doing enough to revive the world's third largest economy and to arrest pernicious deflation.  Some want to criticize it now for pursuing policies aimed to do just that.  Japanese officials have tried talking the yen down in the past and have intervened directly in the foreign exchange market (e.g., over $100 bln in late Oct 2011).  

Moreover, many in the G20 must realize that the same brush that is used to tar Japan can be turned on them.  The G20 meets on Feb 15-16.  It will likely support the thrust of Abe's government policies, though structural reforms seem light, it may discourage officials from offering levels for the market to shoot for, as Nishimura's comments, for example, appeared to do. 

One of the new important steps will be the appointment of the new management team at the BOJ.  Abe, of course, will seek candidates that share his views.  Isn't this precisely the same thing that Cameron/Osborne are doing in the UK?  BOE Governor King appears to think that monetary policy has done all it can.  For King's replacement as his term expires, Cameron/.Osborne have gone outside of  the UK and chosen Bank of Canada Governor Carney.  At Davos, Carney was clearly, advocating a more activist monetary policy and advocated continued monetary support until an economy reached "escape velocity", even if inflation is above target.  That seems to be closer to Cameron/Osborne's views than King's.  

Carney appears to be leaving the Bank of Canada at an ideal time.  Yesterday's downgrade of 6 Canadian banks by Moody's was telling.  It claimed that the high level of household indebtedness and elevated house prices left the banks especially vulnerable to a downside risks of the Canadian economy.  Household debt/income ratios in Canada are estimated to be 165%, which is above US and UK levels at the peak.

Going forward, investors will closely monitoring the downturn in Canadian housing, with prices slipping in H2 12, sales and starts falling.   The US dollar has appreciated almost 3% against the Canadian dollar since Jan 11.  The USD pullback that began yesterday saw some follow through, but new bids emerged ahead of CAD1.0045. 

European news is light.  Two developments stand out.  First, Spain reported horrific December retail sales.  The 10.7% decline (year-over-year) compares with a 7.8% decline in November and a consensus forecast for 9% decline.  This is the largest drop since the 11% decline in Sept.  Although the drop in retail sales was more than expected, the direction should not be.  

Amid rising and record unemployment, the Rajoy government raised the VAT on most types of consumer goods.  Last week the Spain's central bank warned that the pace of economic contraction likely doubled in Q4 to -0.6% from -0.3% in Q3.  Tomorrow, the government will report the official estimate of Q4 GDP. 

Second, despite new political uncertainty injected by the trouble at Monte dei Paschi, Italy's third largest bank receiving its third package of government support, Italy successfully sold 8.5 bln euros of 6-month bills today at yields near 3-year lows.  The MPS derivative scandal appears to have, at least initially, weakened support for the PD's Bersani and the Monti, according to the latest polls.  The election is nearly a month away (Feb 24-25), and the risks of a hung parliament appears to be increasing.