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Global Daily Commentary 10/02/15

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Dollar weakens on profit-taking The dollar weakened against most G10 currencies despite a further rise Fed funds rate expectations and deepening concern about the Greek situation and Ukraine tensions. I can only assume that it was caused by profit-taking after the dollar’s payroll-induced bounce on Friday, as there was no fundamental news behind the move. Newswire reports attribute the dollar’s decline to risk-aversion owing to increased tensions, but that is clearly not true, as the best-performing currencies were the high-beta NZD and AUD, while the safe-haven JPY and CHF lagged behind.

Greek Prime Minister Tsipras vowed to keep on with the program that his government was elected on, namely allowing the current bailout program to expire on schedule at the end of this month while attempting to secure a new program. The Greek government will seek a “bridge agreement until June.” Meanwhile, German Chancellor Merkel rejected Tsipras’ plan, saying the current program was “the basis of any discussions that we have.” She added that “what counts” is the proposal “that Greece puts on the table” at tomorrow’s Eurozone finance ministers’ meeting. But Eurogroup head Dijsselbloem last week ruled out a bridge loan, so tomorrow’s meeting is likely to reject the Greek proposal. Thus the meeting is shaping up to be a key pressure point for the markets.

It’s notable though that while Greek problems are seriously affecting Greek assets, particularly bank stocks and bonds, the euro remained in a tight range vs USD yesterday. Yesterday’s range was only 0.8%, exactly in line with the average for the last six months. It looks as if the FX market may be discounting a successful conclusion to the very difficult talks that lie ahead. I agree that the two sides are likely to come to an agreement somehow, although it’s still hard to see how.

French election shows why EU has to settle Greek problem French President Hollande’s Socialist party won a narrow victory in a by-election in eastern France Sunday, but the real news was that the far-right National Front candidate won nearly 49% of the votes. This was the first parliamentary poll since the terrorist killings in Paris last month. The surprisingly good showing of the NF candidate is one reason why I believe the EU will work out some agreement with Greece. Incumbent politicians must be terrified about how the current austerity programs are fuelling support for their opponents on both the left (e.g., SYRIZA in Greece) and the right (e.g., the NF in France). They have to prove to voters that the EU is listening to them and responding to them, otherwise there will be a revolt.

China’s disinflation deepens China’s consumer price index (CPI) rose at the slowest pace in more than five years in January, rising only 0.8% yoy (vs 1.5% in December), while the producer price index (PPI) fell deeper into deflation at -4.3% yoy (vs -3.3%). As usual, bad news is good news; Shanghai stocks were up 0.8% on expectations that the slowdown in inflation would lead to further monetary easing. Such reasoning shows how divorced the entire financial world is from economic fundamentals and how dependent markets are on the actions of central banks. Nonetheless, AUD and NZD were the best-performing currencies overnight. I believe in basing trading strategies on reality, not hope, and so I maintain my bearish view of these two currencies.

Japan’s tertiary index for December fell 0.3% mom while M2 money supply growth slowed to 3.4% yoy from 3.6%, indicating that the economic recovery remains fragile and the massive injection of base money has so far failed to feed through to accelerating growth in broader monetary aggregates. The ECB might be interested to note how massive QE for months on end fails to boost money supply growth in an economy based on bank lending.

Today’s highlights: G20 meeting ends The G20 meeting ends today. According to Bloomberg, a draft of the communique effectively gave the official stamp of approval to the recent “indirect currency wars.” It said that uneven global economic growth means some nations need easy monetary policies as others move toward normalizing policy and welcomed the ECB’s quantitative easing program. In other words, everyone can continue doing as they are doing. This is bullish for USD and negative for EUR, JPY and almost every other currency, come to think of it.

During the European day, French industrial production for December is expected to rebound from the previous month.

In Norway, the annual rate of growth in the CPI for January is forecast to decline further from the Bank’s 2.5% target. Despite the recent rise in oil prices and the overall country’s economics being in a good condition, we expect the slowdown in inflation rate to weaken NOK further as investors look for further easing from Norges Bank.

UK’s industrial production for December is forecast to fall on a mom basis, with the yoy rate of growth falling in half to 0.5%. That would be three consecutive months of mom decline, suggesting that the economy contracted towards the end of 2014. The news could leave GBP vulnerable.

In the US, only data of secondary importance are coming out. The NFIB small business optimism for January is expected to have increased fractionally to its highest level since October 2006. While this indicator is not particularly market-affecting, it’s well worth watching because of the Fed’s emphasis on the labor market. Small businesses employ the majority of people in the US. The Job Opening and Labor Turnover Survey (JOLTS) report for December is forecast to show a marginal increase in the number of job openings. Following last week’s strong employment data, this is likely to keep the dollar supported. Wholesale inventories for December are also coming out.

As for the speakers, German Finance Minister Wolfgang Schaeuble and ECB Governing council member and Bundesbank President Jens Weidmann will brief reporters after the G20 meeting. The two may be questioned about whether a compromise on Greece will be achieved eventually. I would expect them to maintain their tough tone ahead of the negotiations, which could prove EUR-negative. Richmond Fed President Jeffrey Lacker also speaks.

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