FX Mostly Consolidating After Big Moves

After out sized moves in the foreign exchange market yesterday, a consolidative tone has emerged with a few exceptions.  The big winner yesterday was the euro and with a narrow range of about a third of a cent today, the market seems as if it is catching its breath before assaulting important resistance near $1.33, which capped it in mid-December and at the very start of the new year.  

Sterling recovered from a test on $1.60 at mid-week, but lagged behind the euro.  The pullback today is also more pronounced after the disappointing industrial output figures.  Industrial production rose 0.3%, half the recovery the consensus expected after the 0.9% decline in October.  The key disappointment was in manufacturing, which contracted 0.3% compared with consensus expectations for a 0.5% gain, following the 1.4% slide in October.  The increases concerns that the UK economy slipped back into contraction following expansion in Q3.  Support is now seen near $1.6080.

The dollar moved to new 2.5 year highs against the yen near JPY89.35, encouraged by a larger than expected current account deficit.  The JPY222.4 bln deficit was more than 10-fold greater than the consensus forecast and is the first current account deficit since Jan 2012.  The deficit was a function of a larger trade deficit and a smaller investment income surplus.  Separately, the Japan's government approved a JPY10.3 trillion stimulus of a JPY13.2 trillion extra budget.  For the first time in years the supplemental budget will be financed by new debt issuance (5-year bonds). 

The Swiss franc is under some pressure as well.  Against the euro it is trading near the lower end of its 4-month range.  Yesterday's losses were extended following the soft CPI figures.  December CPI fell 0.2% after a 0.3% decline in November.  The consensus called for an unchanged reading.   News yesterday that another domestic bank is considering charging for franc deposits was seen as a catalyst to get the ball rolling.   Few currencies were able to keep pace with the euro yesterday and the franc was not one of them., 

We note that Cyprus'credit rating was slashed three notches by Moody's to Caa3 and retained a negative outlook.  . Moody's sees a greater likelihood that Cyprus may default of press for a "distressed exchange".  It warned that Cyprus' debt to GDP may rise to 150% this year.  On the other hand, EU Commission Rehn argued against a restructuring of Cyprus' debt, which the IMF seems to be encouraging. 

Lastly, China's CPI came in on the high side of expectations at 2.5% up from 2.0% in November and more than the 2.3% expected.  A significant culprit was food prices and in particular vegetables and pork.   Although this was primarily weather-related (coldest winter in China in almost three decades), it dashed lingering hopes of a near-term cut in reserve requirements. This is turn saw China shares posted their biggest decline in two months.  Indeed, the risk is that inflation pushes higher this month as well.  Food prices rose 4.2% year-over-year in December.