EUR/USD After failing to regain the 1.0900 area, the Euro tended to drift weaker during Tuesday with some overall improvement in risk appetite helping to curb immediate demand for the currency. Structurally, there was also evidence that the Euro’s share of reserves continued to decline in the fourth quarter. Oil prices registered further sharp losses as a rally quickly lost momentum with WTI contracts briefly dipping below the US$30 p/b level which tended to curb potential dollar support. The US NFIB small business confidence index edged higher to 95.2 from 94.8 previously. Consumer confidence was little changed according to the latest survey while there was an increase in job openings to 5.43mn from 5.35mn previously. The data overall still suggested solid domestic demand and a firm labour market. There were still wider concerns that global economic vulnerability and potential export of deflationary pressure from China would curb the potential for further Federal Reserve rate increases this quarter. Richmond Fed President Lacker stated that he would still back at least four interest-rate increases during 2016, although markets were not convinced that the Fed would be able to deliver this amount of tightening. The Euro overall retreated to lows around 1.0820 late in the European session. Although there was solid support at lower levels, the currency was restrained by improved risk conditions.
JPY Overall risk appetite was slightly firmer during Tuesday with equity markets stronger during the session. There was still a high degree of volatility with commodity prices continuing to weaken and hitting 15-year lows in dollar terms. There was also downward pressure on US yields as the 10-year benchmark yield dipped to around 2.12%. Although there was a slight overall reduction in defensive yen demand, the dollar struggled to capitalise and was again unable to break above the 118.00 level. Bank of Japan Governor Kuroda stated that it was difficult to remove the deflationary mindset and there was further speculation that the central bank could relax monetary policy further. The latest Chinese data was stronger than expected with exports falling 1.4% in dollar terms and there was a yuandenominated gain for the first time since June. The data helped improve risk appetite with the dollar moving above the 118.00 level as equity markets gained ground, although underlying sentiment was still fragile.
GBP UK industrial production data was significantly weaker than expected with a 0.7% decline for November after a downwardlyrevised figure of unchanged the previous month. Although potentially distorted by warm weather, there was also a 0.4% decline in manufacturing which left output more than 6% below the 2008 peak, reinforcing structural vulnerability. The NIESR GDP estimate offered some encouragement with an estimated 0.6% growth for the fourth quarter. Bank of England Governor Carney stated that household debt levels did pose indirect risks to the economy, although he declined to make any direct comments on monetary policy ahead of Thursday’s policy announcement. Markets overall were expecting a generally downbeat assessment in the bank’s MPC summary. Sterling overall was still subjected to sharp selling pressure with accelerated selling once the 1.4500 support area was broken with fresh five-year lows near 1.4350. There was also a fresh Euro move above the 0.7500 level with a peak close to 0.7550. There was a recovery late in the European session with a correction from over-sold levels and a rally back to 1.4450.
CHF The Euro was able to find support below 1.0850 against the franc on Tuesday and rallied to the 1.0880 area in US trading as risk appetite improved. The dollar pushed above parity against the Swiss currency with a peak above 1.0050 with some correlation between investor confidence and the franc trend. There will be further speculation that the National Bank would look to intervene and weaken the currency further over the medium term, especially given that it considers the Swiss currency substantially overvalued against the Euro.