Choppy Consolidation Featured

Global capital markets are characterized by choppy consolidative activity.  In the foreign exchange market, two major currencies stand out, the yen and sterling.  

The Japanese yen which is continuing trade higher following the outcome of the much anticipated BOJ meeting that seemingly resulted appearance of easing without really doing very much.  In addition to positioning--vulnerable to a short-covering squeeze--reports that Japanese banks were featured yen buyers- -is making participants cautious about resisting.  It may be difficult for the North American session to push the dollar much above JPY88.50-70 today, preferring to await fresh signals from the Japanese banks.  

BOE King's comments yesterday, suggesting scope for additional quantitative easing if necessary kept sterling on the defensive and seeing it test the $1.58 level for the third time this week.  Two favorable developments helped reinforce the support and lift sterling back up to the upper end of this week's narrow range just above $1.5880.  First were the MPC minutes.   There were again no members willing to join Miles' call for resuming gilt purchases nor does there seem to be any time soon.  Fourth quarter GDP will be released on Friday and a small contraction is widely anticipated after the 0.9% expansion in Q3.  

The second factor aiding sterling was the stronger than expected employment report.  Rather than increase the Dec claimant count fell by 12.1 and the Nov figure was revised to show 8.9k decline rather than the 3.0k decline initially reported.  Nov earnings data (a month behind the claimant count) saw eased a bit more than expected to 1.5%  (3-month year-over-year)  from 1.8% in Oct.  Wages are trailing well behind inflation in the UK.  King yesterday estimated that administered prices were adding 1 percentage point to inflation. 

Elsewhere, the Australian dollar has been confined to yesterday's ranges.  Q4 CPI was reported at 2.3%, just below the mid-point of the RBA's 2-3% target band.  Trimmed and weighted mean measures were a touch lower than expected, but expectations for next month's meeting are little changed, with about a 35% chance of a 25 bp rate cut.  Although. it has delivered 125 bp in cuts in this cycle, real rates are relatively high and economic weakness is becoming more widespread (e.g., jobs, retail sales, trade).  The apparent stabilization of the Chinese economy and firmer iron ore prices do not seem to be sufficient offsets and if not in Feb, a cut in March still seems the more likely scenario.  

The main economic report of the week for Europe comes out tomorrow in the form of the flash PMIs.  After yesterday's stronger than expected ZEW survey, the market may be sensitive to confirmation in the German PMI, which we do not expect to be there.  Look for the euro to be mostly confined to a $1.3280-$1.3350 trading range.  These narrow ranges has seen implied volatility ease for the third day..  Near 7.86% 3-month vol is currently indicated more than a percentage point off the high seen at the end of last week. 

One stabilizing factor for the euro appears to have been the steadying of Euribor.  Recall ideas that banks repaying LTRO funds early would reduce the liquidity helped drive the March Euribor futures contract from an implied rate near 15 bp as recently as Jan 10 to 32 bp last week ,before an ECB official tried to calm the market.  European banks that borrowed LTRO funds must give notice about their intentions on repayments today and starting Jan 30, the ECB report weekly the amount of repayment and the number of counter-parties returning funds. 

The Bank of Canada meets today and the market is highly confident that there will be no change in the key 1% rate.  It will likely recognize that GDP and CPI are a bit softer than it had previously expected.  However, it is unlikely to change the general tone, which appears to be aimed at cautioning what it sees as excessive household borrowing.  Modest range extension is possible today, but  US dollar support is in front of CAD0.9880 and may be capped today CAD0.9940.