FX: A Return to Form?

After trying to  decipher the policy implications of the weak US jobs data, investors are attempting now to look past it.  In the currency markets, this has meant a return to the status quo ante, which was weaker yen and dollar-bloc currencies and stronger euro and sterling.  The euro rallied to test $1.37 and sterling neared $1.6450.  The dollar bounced against the yen from a four-week low near JPY102.85 to near JPY103.80 in the early Europe.  The Australian and Canadian dollars have pared yesterday's gains.  

However, US Treasury yields are still at the lower end of their recent range and global equities have tumbled, following the slide in US markets yesterday.  The Nikkei shed 3% for its biggest decline since July.   Major European bourses are off around 0.5%, led by basic materials and technology, though it is noteworthy that many opened on their lows and have trended higher. 

There have been four pieces of data that stand out.  First, Japan reported a simply horrible current account figure.  On an unadjusted basis, the deficit of JPY592.8 bln is the largest on record and is about 2/3 larger than the Bloomberg consensus.  The unexpected deterioration was not so much a function of the trade account, but the investment income balance.  Net, investment income, which includes interest income, dividends, royalties, licensing fees, and the like, fell to JPY900 bln, the smallest five months.  There does appear to be seasonal weakness in the investment income account in Q4 that likely exaggerated the deterioration.  Still, the shift from Japan being a large trade surplus to persistent deficit is a significant shift for the world economy.  

Separately, aiding the dollar's recovery against the yen, are reports that Suntory has agreed to buy the US-based Beam for $16 bln, of which some $13.6 bln is cash.     This will be the largest overseas purchase by a Japanese company since the Softbank/Sprint ties up in 2012.   The talks are reportedly a couple of months old and the real foreign exchange impact, as opposed to the psychological one, seems marginal as Suntory has indicated it will use cash and a bridge loan to finance the deal. 

Second, the UK reported slightly softer CPI figures and moderating home prices and this pushed sterling down by a little more than half a cent before bids wee found just below $1.6400.  The month-over-month increase of 0.4% brought the year-over-year rate to the BOE's medium term target of 2%, for the first time in four years.  On producer prices, we note that input prices were a bit firmer than expected while output prices were spot on, but the differential between the year-over-year fall in input prices and the rise in output prices widened, which may say something about profit-margins.  

Third, the euro reported a stronger than expected 1.8% rise in November industrial output, lifting the year-over-year rate to 3.0%, a two-year high.     Recent national figures pointed to a strong report, but the Bloomberg consensus was for a 1.4% monthly increase and 1.8% year-over-year.   

Elsewhere, note that ECB's Nowotny, in response to a query, indicated that the ECB was studying conditional long-term loans, but did not seem particularly enthusiastic.  He noted that it was tried in the UK but it had been aimed at real estate financing, which was not a problem in the euro area.  Moreover, Nowotny indicated that with inflation expectations anchored, he did not see the "need for immediate action." 

Fourth, NZIER reported that the New Zealand economy was accelerated and broadened in Q4.  The divergence between it and Australia is fueling much interest in long Kiwi cross positions, with the Aussie-Kiwi cross moving to its lowest level since December 2008 today.  The central bank meets on Jan 29.  While most expect a rate hike in later in Q1, there is some speculation that it could as early as this month.   

There is some thought that the anticipation of the hike is lifting the currency and that an actual move would be cathartic and clear the decks, so to speak.  While this may be true in the short-term, the market appears to be pricing in at least three hikes this year. 

The main data in today's North American session are the US December retail sales and November business inventories.    Headline retail sales are likely to be tempered by the decline in auto sales and the soft holiday brick-and-mortar sales reported (perhaps blunted by stronger internet sales).    The business inventory data is important as economists fine tune estimates for Q4 GDP.  Inventory accumulation appears slightly slower than in Q3, though it is difficult know with any degree of confidence.  Lastly, we note a rise in import prices will be consistent with an increase in PPI expected to be reported later this week.  Separately, the Fed's Plosser and Fisher speak, both are understood to be among the hawks.