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Foreign Exchange

FX research roundup: monotony and mayhem – an omen for the year?

With a sizeable percentage of FX market participants taking an extended break, volumes have, as expected, generally been on the light side this week. Coupled with diverse news flow this has led to whippy markets. One head of spot described the week as “periods of monotony punctuated by mayhem”.


The Chinese rate increase on Christmas Day was a long time ago but established that China will prioritize the containment of inflation over breakneck growth for a while. Not bullish news for commodities or, of course, for the Australian dollar, which is already sinking under the calamity of the Queensland deluge. And the Ashes trouncing.


Estonia joined the eurozone at the start of the year, making its membership 17, but it certainly wasn’t a market mover given that Estonia contributes less than 0.2% of combined eurozone GDP. Of more relevance was eurozone inflation for December moving to 2.2% in December from 1.9% in November. This is not euro-positive as it increases pressure on the European Central Bank to normalize monetary policy while peripheral state debt is still under extreme pressure. But this was offset a little by China declaring its intention to keep buying European debt, although the news fluctuated in strength between a muted “dependent on timing and pricing” statement from Chinese vice-commerce minister Gao Hucheng and a more committed stance, reported with scant attribution by Spanish Daily El País, that China would buy €6 billion of Spanish state debt.


Making the euro situation even harder to read were the Swiss, who, despite China’s confidence in the eurozone, took Irish debt off the list of eligible collateral. The market's grudging take-up of the German 10-year bond auction on Wednesday didn't help either and the imminent publication of the European burden-sharing proposals for bank bondholders also weighed on the single currency. It was hardly surprising then that the currency was on the back foot in the first week of the year and ducked under 1.30 to the US dollar for the first time since December 1. But 1.2950, where there was said the be considerable barrier interest, held firm in front of the US employment numbers with some cautioning that the week’s EUR/USD sell-off was the biggest shift pre- Non-Farm Payroll data we’d had for a while, and that the market could be overweight with shorts.


The prime picks of most commentators in the 2011 outlooks, NOK and SEK, continue to strengthen steadily if not dramatically (both 0.8% up on the year). Liquidity in GBP was particularly sparse for a major currency but faces the week’s big US number off 1% against USD for the year and up 2% against EUR: GBP received a little support from the HSBC dividend conversion at the start of the week but could not be unaffected by the pressure on the euro. Any resurgence of doubt in UK prospects, now that the reality of the VAT rise has kicked in, is not yet evident in the spot price.


As for the dollar, Monday’s Institute of Supply Management manufacturing (stable) and construction data (improving) were OK, the Federal Open Market Committee minutes were slightly more positive on economic prospects than previously and Wednesday’s non-manufacturing ISM figures definitely gave the dollar a positive tone. The ADP employment number gave cause for optimism for Friday’s Non-Farm Payroll data but there has been little correlation between the two figures lately and, even if the NFP data is positive, the FOMC minutes, despite an upbeat economic slant, revealed a resistance among some FOMC members to deviation from the quantitative easing programme. Nevertheless the USD has started the year positively: the DXY is up at 81, having closed 2010 around 79, but a breach of the end-November high at 81.44 will be a tough ask.


The week mustn’t go by without a roll call of intervention. This week’s most aggressive action was from Chile: fed up with CLP strength (it had appreciated nearly 20% against the USD since late May last year) the Chilean central bank bought $12 billion against the peso, driving its currency down 6% in two days. Brazil continued to sell the real in daily auctions and imposed new legislation during the week, particularly the imposition of reserve requirements on USD short positions: the BRL came off nearly 3% from the January 3 USD/BRL low at 1.6430.


NB And then the number came out: payrolls disappointing elevated consensus but the unemployment rate unexpectedly falling to 9.4%. Cue a leap up to 1.3020 or so having broken the 1.2950 level seconds before the figures. But all in all the payroll figure only disappoints compared to the ADP so back it comes to sub-1.2950 before finding some temporary equilibrium at 1.2980 or so. If this week is any indication of how the year will play out it will be interesting to say the least.

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