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Daily Commentary 13/02/15

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Monetary policy divergence lives Yesterday was a great example of the monetary policy divergence that is driving (some) FX rates nowadays. Faced with similar circumstances, the Riksbank and the Bank of England interpreted the inflation outlook totally differently. The Riksbank pointed to strong labor markets and signs that “inflation has bottomed, and is now rising,” but cut rates and instituted a “mini-QE” nonetheless in part because of lower oil prices. In the UK however Bank of England Gov. Carney dismissed lower oil prices as a temporary factor and emphasized that the Bank is on the path to hike. We have heard from many central banks about the role of lower oil prices in creating a disinflationary environment. Britain however is looking through the drop (which naturally will fall out of the year-on-year comparison in a year) and move up their forecast for when inflation will come back to target. Its monetary policy is clearly diverging from other countries and this should support GBP on the crosses going forward, although perhaps not against USD, which is also on the path to hike. As we approach the elections in May though political risk may come to the fore and GBP may weaken again, as there are several possible results of the election that could be disturbing to markets.

After four consecutive opens with a 1.13 handle, EURUSD is starting trading in Europe at 1.1434. The cease fire in Ukraine has boosted the euro, while weaker-than-expected US retail sales hurt the dollar all around. The recent pattern is for US retail sales to disappoint and EURUSD to move higher on the day, but for the move to reverse the next day – so watch out today!

Talk of EU/Greece compromise EURUSD is also being boosted by talk of a compromise between the EU and Greece. According to Bloomberg, Germany won’t insist that all elements of Greece’s current aid program continue. As long as the program is extended, Germany might be willing to compromise on the size of Greece’s budget surplus requirement and privatizations. For its part, Greece is prepared to commit to a primary budget surplus, as long as it’s lower than the current 4% of GDP. The German newspaper Die Welt said a deal could be reached by the deadline next Monday. This seems to me like a reasonable basis for a compromise: Germany gets what it wants, namely a continuation of the program, while Greece gets some relief from austerity. This would be very good news for the euro and indeed for risk assets overall as it would remove the biggest risk hanging over the global financial system. A solution to the Greek problem might therefore be negative for JPY and CHF as it would diminish any safe-haven demand.

RBA testimony Reserve Bank of Australia (RBA) Governor Glenn Stevens said in his semi-annual testimony before Parliament that he still thinks monetary policy has a role in supporting the economy, but that its power to boost demand may be less than in the past because of the already-low level of rates. His comments had little impact on AUD.

Today’s highlights: During the European day, the spotlight will be on the preliminary Q4 GDP figures for France, Germany and the Eurozone as a whole. France’s GDP grew 0.1% qoq, as expected, while Germany’s GDP beat expectations tremendously, rising 0.7% qoq instead of +0.3% as expected (previous: +0.1%). This creates some upside rise to the Eurozone’s preliminary GDP rate for Q4, which is expected to have remained unchanged from Q3 at +0.2% qoq. This could prove EUR-positive.

In Canada, manufacturing sales for December are forecast to rise, a turnaround from the previous month.

In the US, the preliminary University of Michigan consumer sentiment for February is expected to remain unchanged at its highest level since January 2004. The surveys of 1-year and 5-to-10 year inflation expectation outlook are also coming out. While expectations for inflation one year ahead have been trending lower, expectations about inflation over the longer term remain steady at close to 3%, which is quite sufficient given the Fed’s inflation target is only 2%.

As for the speakers, Riksbank Deputy Governor Kerstin af Jochnick and Dallas Fed President Richard Fisher speak.

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