FX Report 29 January 2016

morninglondon.jpgMorning Users;
EUR/USD The Euro maintained a resilient tone on Thursday, especially against the dollar and yen in choppy trading conditions. Eurozone economic confidence weakened to a five-month low, maintaining unease over the outlook, especially as a generally firmer Euro has tightened monetary conditions. German inflation data was in line with expectations as the annual rate moved higher to 0.5% from 0.3% despite a seasonal sharp decline in January prices. The Euro-zone rate will be watched closely on Friday with the rate important in determining the amount of pressure on the ECB for further monetary stimulus. There were, however, reports of divisions within the central bank which will complicate President Draghi’s stance. US durable goods data was significantly worse than expected with a 5.1% headline decline for January while the underlying data was also weaker than expected with a 1.2% monthly drop, maintaining the run of generally disappointing capitalspending data. There was a slightly larger than expected decline in jobless claims to 278,000 in the latest week from a revised 294,000 previously while pending home sales were slightly weaker at 0.1%. The dollar was still hampered by the slightly more dovish Fed outlook from Wednesday with expectations of a March rate increase steadily draining away. The Euro was able to edge higher with a test of resistance above 1.0950 with a further underlying covering of short positions. There were net Euro losses on Friday as the Bank of Japan move boosted the dollar and strengthened risk conditions.
JPY  After edging higher ahead of the US open, the dollar was undermined by durable goods data. Trading volatilities then spiked higher with an initial surge in energy prices following reports that Opec and non-Opec producers could agree a 5% production cut. Risk appetite initially surged before retreating as the reports were denied by Saudi Arabia and the dollar reversed gains. There was buying support below 118.50 as US equities made headway, although there was a decline in US bond yields. There was some speculation that the Bank of Japan could relax monetary policy which cubed yen support.  Japanese economic data was very weak with a 4.4% annual decline in household spending and 1.4% decline in industrial production. The Bank of Japan sanctioned a further easing of monetary policy with a move to negative interest rates of -0.1% on balances held at the central bank. There was a 5-4 vote with significant internal opposition to the move and there are some exemptions. In response, Japanese bond yields fell to record lows with 10-year rates at 0.09%. The yen also fell sharply with the dollar pushing to highs above 121.00 before a correction with sharp losses on the crosses.
GBP  UK fourth-quarter preliminary GDP growth was in line with expectations at 0.5% with the annual rate also meeting consensus expectations at 1.9%. Services expanded significantly during the quarter with both industrial production and construction contracting for the quarter. There was some relief that the data was not worse than expected and there was Sterling short covering following the data. The CBI retail sales data was slightly lower than expected at 16 from 19 previously which did not have a significant impact while consumer confidence was slightly stronger than expected. Sterling gained some net support from an improvement in risk appetite and spiked higher during the New York session with a break above resistance around 1.4360 triggering fresh buying. Gains were pared later in the day with the Euro back above 0.7600, but Sterling advanced again on Friday as risk appetite improved once again.
CHF The Euro maintained a robust tone against the franc on Thursday, briefly pushing above the 1.1100 level for fresh 12-month highs and extending the sequence of daily gains to six. In this environment, the dollar was able to hold above 1.01 against the Swiss currency.  There was further underlying speculation of National Bank intervention to push the currency weaker while a slightly firmer tone surrounding risk also curbed immediate Swiss support. Overall franc confidence remained weaker with some speculation that there would be a fresh cut in interest rates at March’s meeting.
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