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Daily Commentary 30/01/2015

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Is the RBA next in line? Following the Reserve Bank of New Zealand’s (RBNZ) policy shift, the market naturally started thinking “who’s next?” and the AUD was the natural target. With the Reserve Bank of Australia (RBA) meeting next week, it’s the obvious candidate. AUD fell sharply as a result. Note that Denmark also eased further yesterday; it cut its CD rate by 15 bps to -0.50% and said the move follows its “purchase of foreign exchange in the market.” This shows the pressure on central banks to ease as their counterparts elsewhere do so. The Australian Business Review newspaper ran an article saying that “(p)ressure is building for the Reserve Bank to cut official interest rates, even as early as next week.” (It argued that the RBA should resist the pressure and not cut rates.) I think that even if it does not, it is likely to shift to an easing bias, much as the RBNZ shifted its bias, and that alone should be enough to weaken the currency further.

CHF weakens; SNB intervention? The AUD wasn’t the worst-performing G10 currency overnight. That honor went to CHF, which just barely nosed out the AUD. EURCHF in particular jumped 1.7%. Perhaps investors feel that the decline in CHF went too far. Perhaps the Swiss National Bank (SNB) is covertly intervening – as mentioned above, the Danes were. In any case, it looks like the CHF’s momentum has been broken and it’s at least a two-way bet nowadays. Personally I think the currency is so vastly overvalued that eventually something has to give. EURCHF and USDCHF should move higher, in my view. But the trade surplus remains near a record high so it’s clearly not going to be quick. The CHF has been overvalued on a purchasing-power parity basis for decades now (since 1987, according to the OECD’s methodology) with apparently no ill effects, so don’t expect mean reversion any time soon. However with Swiss interest rates now negative out to 10 years, perhaps we will see more capital outflows from Swiss investors that will weaken the currency.

Japan’s output accelerates but inflation slows further The usual end-of-month data dump from Japan Friday showed that inflation continued to decelerate and household spending dropped even as the employment picture improved and industrial production finally picked up. The national CPI was unchanged in December at 2.4% yoy, but the core (excluding fresh foods) measure slowed to 2.5% from 2.7%. The Tokyo core CPI (excluding fresh foods) for January similarly slowed to 2.2% from 2.3%. This despite a recovery in industrial production, which was up 1.0% mom in December contrast to the -0.5% decline in November. The jobless rate declined further and the job-offers-to-applicants ratio improved as well, but household spending continued to decline – it’s fallen yoy for the last nine months in a row, ever since the consumption tax was hiked in April. It looks to me like Japan is finally getting an export-led bounce, as exports were up a surprising 12.8% yoy in December. Certainly the domestic picture is not encouraging; people continue to cut back on their spending despite an improving employment picture. This makes me think that the authorities are likely to see the weaker yen as perhaps their most successful policy achievement to date. Certainly in the context of global loosening, when so many central banks around the world are moving to a looser policy, the Bank of Japan will not want to lose the advantage that it’s gained. I think we are likely to see a continued weak yen.

Two central banks remain on hold Not every central bank is on the easing bandwagon. The South African Reserve Bank (SARB) and Bank of Mexico kept their rates unchanged yesterday.

Today’s highlights: During the European day, the main event will be the first estimate of Eurozone CPI for January. The fall of German CPI into deflation increased the likelihood that the bloc dips further into deflationary territory. This may keep EUR under selling pressure. Eurozone’s unemployment rate for December is also due out.

German retail sales for December are forecast to decelerate a bit.

In Norway, we get the unemployment rate for January and retail sales for December. Since the unemployment rate remains at very low levels, the market is likely to watch more the retail sales. Any disappointment may act as a trigger and push USDNOK above the 7.84 strong resistance line.

In the UK, we get the mortgage approvals for December.

In the US, the 1st estimate of GDP for Q4 is expected to show that the US economy expanded at a slower pace than in Q3 (3.0% qoq SAAR vs 5.0%) The 1st estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have eased from the Q3. The employment cost index, a closely followed gauge that reflects how much firms and government pay their employees in wages and benefits, is expected to decelerate a bit from Q3 but remain above both the inflation rate and the average earnings figure, reassuring the Fed that compensation is rising along with improving employment conditions. The Chicago Purchasing managers’ index and the final University of Michigan consumer sentiment for January are coming out. Investors are likely to pay particular attention to the U of M surveys of 1-year and 5-to-10 year inflation expectations after the FOMC said Wednesday that “survey-based measures of longer-term inflation expectations have remained stable.”

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