FX Update: Market trying to shrug off Egypt

With a heavy week of data ahead, market is trying to shrug off the uncertainty surrounding Egypt and the potential for regional contagion - succeeding in some places to overcome uncertainty and certainly failing in other areas. What are we to make of the mixed market message?

With all eyes still on Egypt and the potential for regional contagion, major markets are trying to get back to pre-Friday levels, and have been mostly successful in G-10 FX country, at least, though the damage is still quite evident in some of the emerging market currencies, and the equity market comeback is less pronounced. It seems FX is serving as a high beta indicator in these markets, meaning that we should, more than ever, have our eyes out for confirming indicators from equity, bond and other markets before taking moves in FX at face value.

Odds and Ends
New Zealand trade data showed a huge shortfall in the trade balance relative to expectations, as historically, the trade balance turns more favorable at this time of year due to the southern hemisphere’s summer/fall harvest. A large surge in Imports was the reason for the shortfall due to importation of a number of aircraft, so we shouldn’t read too much into this data point.

New Zealand Building Permits, on the other hand, fell over a cliff and suggest that housing activity in New Zealand continues to decline sharply. The data saw the NZD generally weaker overnight in many crosses, though the forward rate expectations hardly budged, falling only a couple of bps.

The US PCE Core inflation data came out at +0.7% YoY. This is a record low in the data series, which stretches back to 1960 and is often considered the Fed’s favorite price data series, so the release saw the USD weaker on the rate implications. Meanwhile, ECB rate expectations arched back higher as the merciless Euro squeeze suddenly reappeared and interest rate spreads at the front of the curve stretched to a new wide level.

Chart: EURUSD
The Friday swoon in EURUSD has fully reversed as the low US inflation data on the one hand and Trichet belief that the ECB rate and commodity prices should have something to do with each other (while PIGS crisis is seemingly irrelevant) on the other hand sees the Euro-US rate spread squeezing to new highs for the cycle. The EuroZone periphery must adore Trichet for his visionary management of expectations and the strong currency that ensures a deflationary death grip on their economies. 

Remember that this is end of the month fixing, though market moves from this source may be rather muted due to relatively small changes in the world equity and bond markets for the month.

Looking ahead
Up shortly we have the US Chicago PMI, which is the final regional manufacturing survey of the month ahead of tomorrow’s national ISM survey. The other surveys have been strong, if slightly less so than expected. Last month’s 66.8 reading tied the highest reading since 1994, so a little mean reversion is inevitable.

Tonight, watch out for the RBA Cash Target decision, with the vast majority expecting no change to the interest rate (and rightly so, especially given the events in the Middle East at the moment.) and year-forward expectations not even fully pricing in a move to 5.0%. The AUD is back on the bid today on copper prices rising sharply again from Friday’s close and the healthy bounce in risk appetite. This is a fairly heavy week for Australian data as well, with the NAB and manufacturing surveys also out tonight, New Home Sales Wednesday, and services industry survey, building approvals and trade balance on Thursday. Among the G-10 currencies, AUD is almost tied with CAD for title of weakest currency over the last five trading days.

A very busy week ahead elsewhere as well, with the two US ISM’s up, tomorrow (manufacturing) and Wednesday (non-manufacturing), the ECB on Thursday, and the US employment report Friday. In China, the Chinese New Year holiday hits full swing mid-week and the Chinese markets will be closed from February 2 to February 8. It will be interesting to see how the Chinese authorities get back down to business at the end of the holiday, as there is still the potential/likelihood for plenty of policy action there for dealing with the overheating/unbalanced economy.

The market action is bizarre in places. Why on earth has copper rallied as EM is in the dumps? Why is the market so persistently taking the Euro higher here. Why are AUD and CAD rallying so vigorously this morning. Did Egypt happen for some markets and not others? This is confusing if not nonsensical and a very healthy dose of caution is warranted here.

Economic Data Highlights

• New Zealand Dec. Building Permits fell -18.6% MoM  vs. -1.3% expected
• New Zealand Dec. Trade Balance out at -250M vs. +50M expected and -186M in Nov.
• Japan Nomura/JMMA manufacturing PMI out at 51.4 vs. 48.3 in Dec.
• Australia Dec. RP Data-Rismark House Price Index fell -0.7% MoM and was up +0.2% YoY vs. -0.2% YoY in Nov.
• Japan Dec. Industrial Production out at +3.1% MoM and +4.6% YoY vs. +2.8%/4.4% expected, respectively and vs. +5.8% YoY in Nov.
• Japan Dec. Housing Starts rose +7.5% YoY vs. +4.6% expected and +6.8% in Nov.
• Japan Dec. Construction Orders rose +13.1% YoY vs. +1.1% expected and vs. -5.3% in Nov.
• Germany Dec. Retail Sales frell -0.3% MoM and -1.3% YoY vs. +2.0%/+1.1% expected, respectively and vs. +2.0% YoY in Nov.
• Norway Dec. Retail Sales fell -2.0% MoM and rose +2.6% YoY vs. -1.0%/+3.6% expected, respectively and vs. +8.7% YoY in Nov.
• EuroZone Jan. CPI estimate rose to 2.4% vs. +2.3% expected and vs. 2.2% in Dec.
• Canada Nov. Gross Domestic Product out at +0.4% MoM and +3.0% YoY vs. +3.4% YoY in Oct.
• Canada Dec. Industrial Product Pricesrose +0.7% MoM vs. +0.6% expected
• Canada Dec. Raw Materials Price Index rose +4.2% MoM vs. +4.0% expected
• US Dec. Personal Income rose +0.4% MoM as expected
• US Dec. Personal Spending rose +0.7% MoM as expected
• US  Dec. PCE Core was flat at 0.0% MoM and +0.7% YoY vs. +0.1%/+0.8% expected, respectively and vs. +0.8% YoY in Nov.
• US Dec. PCE Deflator out at +1.2% YoY vs. +1.3% expected and 1.1% in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

• US Jan. Chicago PMI (1445)
• US Jan. NAPM – Milwaukee (1500)
• US Jan. Dallas Fed Manufacturing Activity (1530)
• UK BoE’s Haldane to Speak (1700)
• US Fed’s Lockhart to Speak (1700)
• New Zealand Q4 Private Wages and Average Hourly Earnings (2145)
• Australia Jan. AiG Performance of Manufacturing Index (2230)
• Australia Dec. NAB Business Confidence (0030)
• Australia Q4 House Price Index (0030)
• China Jan. PMI Manufacturing (0100)
• Japan Dec. Labor Cash Earnings (0130)
• China Jan. HSBC Manufacturing PMI (0230)
• Australia RBA Cash Target (0330)