FX Report 11 December 2015

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EurUsd The Euro was confined to narrower ranges during Thursday with no further move above the 1.1000 level against the dollar while there was support above the 1.0900 area. Underlying concerns surrounding global risk and pressure for a covering of short positions was offset by some longer-term Euro selling on yield grounds which tended to restrict market ranges.  There was further underlying uncertainty surrounding ECB policies, especially with fresh downward pressure on energy prices which will tend to put downward pressure on headline inflation. Council member Liikanen stated that the bank was ready to take additional action if required while Bundesbank head Weidmann maintained his opposition to last week’s action. There was further uncertainty surrounding the impact of next week’s Federal Reserve meeting even with very strong expectations that the Fed Funds rate would be increased by 0.25%. Overall yield trends provided net dollar support. There was a larger than expected increase in jobless claims to a three-month high of 282,000 in the latest week from 269,000 previously and there is some evidence that the underlying trend has started to edge higher, although this is volatile on a weekly basis. Friday’s retail sales data is unlikely to have a major impact unless it is substantially different from market expectations. The Euro remained trapped below the 1.1000 level and consolidated just below 1.0950 with caution building ahead of next week’s Federal Reserve decision given uncertainty over the global reaction.
JPY  The dollar pushed back above the 121.50 level against the yen ahead of the New York open before being dragged lower again in US trading. There were further concerns surrounding the impact of lower oil prices on leveraged assets with the threat of wider liquidation which could push equity markets lower and risk conditions stayed fragile.  US bond yields still moved higher on expectations of the Fed raising interest rates next week with 10-year yields around 2.23% which helped curb further selling pressure on the dollar and it nudged higher later in the US session. There was further weakness in the Chinese yuan on Friday to the lowest levels since early 2011 and, although this tended to unsettle risk appetite, it also reinforced underlying pressure for weaker Asian currencies. There was also some speculation that the Bank of Japan would ease monetary policy in January and the dollar tested resistance above 122.00.
GBP  Latest UK trade data was much worse than expected with a goods deficit of GBP11.8bn for October from GBP8.8bn previously with strong gains in imports illustrating structural vulnerability and an overvalued currency within Europe. There were no surprises with the Bank of England interest rate decision as the MPC again voted to leave interest rates on hold. There was also another 8-1 vote as McCafferty continued his call for a 0.25% increase in rates. In the statement, there were further expectations that inflation would stay at very low levels in the short term with the bank still expecting deflationary pressure from global trends. There was further uncertainty over labour-market trends with some evidence that growth in earnings had levelled out over the past few months.  The comments overall were more dovish than expected and Sterling dipped lower before quickly finding fresh support above 1.5100 against the dollar and there was also support on approach to 0.7250 against the Euro. Further speculation that the bank will have to keep policy loose to combat global deflation pressures will tend to limit Sterling underlying support.
CHF At its quarterly policy meeting the National Bank left the Libor rate unchanged at -0.75% which had been the consensus expectation. Comments from officials including Chairman Jordan were broadly in line with recent rhetoric with the franc still seen as overvalued mainly due to wider Euro weakness. There was a further commitment to intervene in the market if required. The franc briefly strengthened following the decision and Euro rallies faltered again later in the day with a test of support below 1.0800. The dollar also hit resistance above 0.9900.

Saluti.

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