All Quiet on the Currency Front

Sometimes there is price action on no news, but today there is news and minimal price action as the US dollar is confined to fairly narrow ranges in mostly lackluster activity.  There have been several developments, but given the holiday mood, and ahead of tomorrow's FOMC decision,  one  should not expect much. 

The Bank of Japan meets later this week.  We do not expect the BOJ to move further on QQE until there is evidence that it is needed, which means after the April retail sales tax increase.  In mean time, there are modest adjustments that are can be implemented.  For example, it has low rate lending facility directly to industry.  It is to expire in March 2014.  It was a JPY5.5 trillion program, of which about JPY1.5 trillion  has not been disbursed.  There are some reports suggesting that this facility can be extended a year and expanded by another JPY1 trillion.

Separately, the BOJ may also signal no intention to sell shares that it has bought for two more year (March 2016).  The Nikkei, which settled at one week lows yesterday did not see follow through selling, spent the session in a largely consolidative mode. 

The UK reported slighter softer inflation figure and saw sterling slip a bit lower on the news.   November CPI rose 0.1% for a 2.1% year-over-year pace, down from 2.2%.  It is the lowest since 2009.  Producer prices were also soft and this.  As the UK economy strengthened this year, price pressures eased.  UK asset markets and sterling seemed unappreciative of this today.  Lastly we note the ONS measure of house prices rose 5.5 year-over-year in Oct.  Last October it had risen 1.4% from the previous year.  Key support for sterling is seen near $1.6240-60.  

Sweden's Riksbank delivered a 25 bp rate cut and signaled the likelihood of another cut next year.  It does not anticipate a rate hike until 2015.   This is a bit more dovish than many expected.  Prior to the meeting, the euro had sold off to test SEK9.00, but quickly rebounded to new highs (~SEK9.09) on the news before settling down.   Last week's high was nearer SEK9.10.   The euro had rallied about 3.25% against the krona since Dec 4 and by 6.5% since Sept 20. 

Surveys continues to point to an acceleration of German growth.  Yesterday's flash PMI has been followed by the ZEW survey today.  German investor confidence is at the highest level in more than seven years.  The assessment of the current condition rose to 32.4 from 28.7 and the expectations component rose to 62.0 from 54.6.    The euro has been confined to a narrow 30 tick range ($1.3752-$1.3782) inside yesterday's action.   The euro has entered a consolidative phase since the start of last week.  Stops are likely below $1.3700, which if triggered, may have greater impact a break of last week high near $1.3810. 

The RBA minutes did not break new ground and was not specific as Governor Stevens has been subsequently.   The door is left open for a future rate cut.   Stevens testimony before the House tomorrow will provide another opportunity to talk the Aussie down, though we suspect he will refrain from repeating a specific bilateral nominal target (e.g., $0.8500).  Rather than RBA minutes, it was the updated government fiscal projections.  The new government announced a dramatic deterioration of its budget in the current fiscal year.  The deficit is now expected to swell to A$47 bln from A$30.1 bln projected at mid-year. 

The Australian dollar remains confined to the range set before the weekend ($0.8910-0.8970).  The year's low, seen in early August just below $0.8850 is the immediate target.    The Australian dollar is being sold to new multi-year lows against the New Zealand dollar.  New Zealand, in contrast, projected a larger budget surplus and intentions to borrow less.  The RBNZ is expected to hike rates twice in H1 2014. 

Today's North American session features the US CPI report and the Q3 current account.  The headline pace of CPI is expected to tick up to 1.3% from 1.0% in Oct.  The core rate is likely little changed from the 1.7% pace.  The historical experience in the US is for the headline rate to converge with the core rate rather than the other way around.  However, as we have noted the core PCE deflator, the Fed's preferred measure, shows a somewhat different pattern.  The large rises in Nov-Dec (0.8% and 0.5% respectively) in 2012 will drop out of the year-over-year comparison, producing a large drop in coming months.