- Profit-taking continues to dominate dollar
- No incentive to push dollar higher
- Norges Bank cannot afford to be misread
- Greeks dominated by European timetable
The forex market becomes more difficult to read when the obvious trade is the only trade. When investors’ appetite for that particular currency is no more, at least temporarily, it tends to sow confusion. Currently, the market is clamoring for the U.S. dollar. Over the past 24 hours, renewed uncertainty regarding the impact of a potential Grexit (Greece’s withdrawal from the eurozone) has wounded risk-on sentiment, leading to losses across global bourses. The exception being the Shanghai Composite, but only because a five-year low in China’s consumer-price index (CPI) to +0.8%, and the biggest drop in six years for its producer-price index (-4.3% — 35th consecutive decline) has further fueled expectations of continued easing by the People’s Bank of China (PBoC).
Weak Consumer Demand in China
China’s overnight price reports rationalizes last week’s target reserve requirement ratio (RRR) cut by the PBoC, and it’s further proof that the global deflation phenomena is gaining momentum. Even the world’s largest economy is not immune to the effects of lower prices as it moves toward the brink of a deflationary spiral. The data strengthens the prospect for further policy action likely before the end of the first quarter in the format of a further -50bps cut to the RRR. For now, the excessive market CNY weakness seems to have subsided a tad as the market continues to focus on what Chinese policymakers are saying.
PBoC comments in its fourth-quarter monetary policy report indicate that the authorities are expected to keep national policy not too tight, not too loose. Basically, fine tune the economy in a timely manner with prudent monetary policy by using quantitative and pricing tools. The PBoC is probably under more strain than most central banks, as it juggles with weaker growth, hot money flows, and shadow banking. Officials have to keep the wheels greased and prevent an extreme slide in economic growth while avoiding an excessive credit stimulus. When China sneezes, all of us catch a cold.
Will Norway Cut Again?
Interest rate recalibration by central banks is now in full force. It is a capital markets objective to accurately price and telegraph rate moves to investors. Nevertheless, forex and fixed-income speculators are always looking for that “extra” clue so they can anticipate the next currency move. Norway’s CPI declined by just -0.1% in January against market expectations of a -0.3% fall. The headline rate eased to +2% from +2.1% year-over-year, while core inflation was unchanged at +2.4%. The market consensus feels that though Norway is holding up for now, the probability that the impact of lower oil prices affecting growth negatively will eventually lead to lower inflation. A percentage of the bond market is beginning to price in another possible move by the Norges Bank as early as next month. At €8.57, the NOK level is now the focus. The NOK is much higher than when the central bank cut rates in December. Norwegian policymakers assumed a much lower NOK in its December outlook. With crude prices bouncing slightly when compared to the most recent falls, the market should be anticipating at the very least a “super dovish” Norges Bank or an interest rate cut.
Euro’s Direction Dependent on Greece
The current prospects for the single currency will continue to be driven by the very tight timetable to negotiate a new support package for Greece. The market is not willing to go all in at current price levels (€1.1290). The risk/reward does nothing for the current odds.
The European Union continues to take a tough line with Greece ahead of key meetings. Eurogroup finance ministers meet tomorrow before the E.U. leaders’ summit on Thursday. It does not end there; further Eurogroup meetings next week will follow these. Spillover effects to the eurozone as a whole have been limited with some tension already having been alleviated after the leader of the Independent Greek party, Panos Kammenos, stated that the government has a “Plan B” if the E.U. remained rigid on any agreement.
Nevertheless, if Greece was to leave the eurozone, it would materially increase the downside risks for the EUR in the near term, and threaten the financial stability of the 28-nation bloc. The single currency is again retesting below the psychological €1.1300 handle, not with conviction, just trepidation with stellar momentum as the market heads stateside.
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