European Currencies Rally, Dollar-Bloc Heavy

This week's pattern remains intact.  The US dollar continues to trend lower against the European currencies, but is firmer within the dollar-bloc and against the yen.  Spanish and Italian bond yields are lower, while the long-end of the Japanese curve is heavy.  Equity markets are finishing the year with a firm note, with board gains in Asian, with the notable exception of Shanghai and Jakarta, and in Europe, with the exception of Stockholm. 

 

The euro is at 7-month highs today, pushing toward $1.3300. The next target is near $1.3385.    Sterling has been bid to near the year's high set in late September just above $1.6300. There is little chart resistance until closer to $1.6500.   The dollar's slide against the Swiss franc has extended to CHF0.91 and appears headed for CHF0.9000.

 

The dollar-bloc is not participating in this move against the greenback.  This week, for example, the New Zealand dollar has fallen as almost as much as the yen (1.03% and 1.08% respectively).  The Australian and Canadian dollars are off 0.04% and 0.57% respectively.  

 

There are a few macro-developments to note:

 

1.  Japan:  The BOJ meeting concludes tomorrow.  Abe continues to press his case.  There is more talk of open-ended asset purchases, like the Fed and ECB, but what does it mean in practice?  It does not mean QE-infinity as some critics claim.  It seems to mean no pre-determined limit.  The Fed is clearly specifying the amount it intends to purchase, which in 2013 seems to be roughly the equivalent of the budget deficit.  The ECB has not bought a single bond under its open-end commitment.  It imposed its own limits in terms of duration.   The BOJ has extended its asset purchase program several times this year.  It shows a willingness to continue to do so.  It seems like only a slight difference, largely in terms of presentation, of an open-ended commitment.  

 

2.  The German IFO survey was firmer than expected, with the headline up to 102.4 from 101.4 in November and expectations for an increase to 102.  It was driven by a rise to 7-month highs in the expectations component.  However, the assessment of current conditions actually fell to 2.5 year lows.   

 

3.  Minutes from the BOE's MPC meeting earlier this month did not appear to contain surprises.  By an 8-1 vote, it did not renew its gilt purchase scheme and for nearly four years (45 months), it kept the base rate steady.  The recent uptick in inflation and some administered price increases likely to filter through into early next year, the MPC may be reluctant to purchase more gilts initially.  A six month review of the Funding for Lending Scheme is due in January.  The preliminary evidence seems to suggest it has been better more mortgage lending than corporate lending. 

 

4.  Italian politics remains unsettled.  After pulling support for the technocrat government, forcing election 6-8 weeks earlier than they otherwise would have been, Berlusconi  now is urging a delay in the election, seeking more time to campaign.  His party is playing for time in parliament as well.  It means that the 2013 budget is unlikely to be passed this week, which had been expected.   The election now looks likely for Feb 24, but it could be pushed into March. 

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