Currency Report 17 November 2015

EurUsd After briefly gaining ground during the early European session on Monday, the Euro move steadily lower as the dollar gained wider support. As far as Euro-zone inflation is concerned, there was a small uptick in the final October headline estimate to 0.1% from 0.0% with the core rate also revised marginally higher to 1.1% from 1.0%. At the margin, this could discourage more aggressive ECB monetary easing, although the overall impact was limited. There were further concerns that the Paris attacks could damage internal confidence and have a negative impact on trade.  ECB member Constancio was broadly neutral stating that rates will stay low for a long period of time to bring inflation closer to target. Fellow member and chief economist Praet stated that there was a risk of inflation expectations becoming de-anchored which is an important signal of bank concerns and indicates the strong probability of fresh action at December’s meeting. The US New York Empire manufacturing survey registered only a marginal improvement in the latest survey to -10.7 for November from -11.4 previously which suggested there were still important stresses within the manufacturing sector. There were still strong expectations that the Federal Reserve would increase interest rates at December’s meeting. The latest CPI data will be watched closely on Tuesday as a higher than expected reading would give the Fed more justification for a December rate hike while softer than consensus data would create fresh uncertainty. The Euro lost support in the 1.0700 area and dipped to lows around 1.0660 early in the Asian session on Tuesday without being able to make any significant recovery as yield expectations continued to weigh on sentiment.
Jpy  There was some evidence of defensive flows into the US Treasury market during the day with US benchmark ten-year Treasury yields falling to near 2.25%. Despite lower yields, the US currency was resilient against the yen with gains for the Japanese currency on risk aversion early in the session fading quickly. Following the GDP data and second quarterly contraction, there was further speculation that the Bank of Japan would embark on further monetary expansion within the next few months which undermined sentiment. As US equity markets moved higher, the dollar pushed to highs in the 123.20 area. Risk conditions stayed calm during the Asian session on Tuesday with the Nikkei index registering gains of around 1.0% with regional markets firm and the dollar consolidated above 123.00.
Gbp  Although there was some concern surrounding global risk appetite which could undermine Sterling over the next few weeks, there was no evidence of a major impact on Monday.  The UK currency advanced steadily to highs near 0.7020 against the Euro while finding support below 1.5200 against the dollar. Political considerations will be important as the Paris attacks and wider security concerns will inevitably have an impact on British demands for a re-negotiation of EU membership terms. Security concerns could push members closer to the UK position. The latest inflation release will be watched closely on Tuesday with expectations that the headline rate remained at -0.1% while the core data will also be significant for overall Bank of England policy expectations. There was further speculation that the MPC backed away from potential monetary tightening due to the adverse impact of Sterling strength against the Euro and global currency tensions. Although steady against the Euro Sterling dipped back below 1.5200 against the dollar on Tuesday.
Chf  The Eur stayed on the defensive against the franc on Monday, drifting below the 1.0800 area, although losses were contained. The dollar pushed to eight-month highs just above 1.0100 on wider strength and held a robust tone. The franc is seen as a traditional safe-haven when global risk conditions deteriorate, but there was no evidence of strong franc demand during Monday. Support was undermined by expectations that the National Bank would intervene to curb significant gains and push interest rates even further into negative territory.
Regards All.

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