Confidence Returns To Commodity Currencies

Yesterday was a fairly quiet day, apart from a brief flurry of excitement when the Swiss National Bank (SNB) announced negative interest rates. The FOMC meeting continued to reverberate through the market and the implied interest rate on Fed funds futures rose a further 3 bps in the long end while 10-year bond yields rose another 7 bps on top of Wednesday’s 7. US economic data was pretty much in line with expectations and in line with past data and so did not change the picture of the US economy in any great way. On the other hand, the second consecutive rise in the German Ifo survey and UK retail sales rising at their fastest annual pace in over a decade, plus a calmer situation in Russia (USD/RUB fairly stable during the day, MICEX stock index +4.5%) seemed to bring greater confidence about global growth next year and the commodity currencies gained against the dollar, even though commodities themselves were generally lower. The same rationale meant less demand for safe-haven currencies and JPY and CHF were the worst-performing G10 currencies. EM currencies were mixed.

I noted yesterday that the S&P 500 had the best day of the year on Wednesday, however it beat that on Thursday with a 2.4% rise = up 4.5% in two days. The last time the market had back-to-back best days for the last 12 months was apparently in 1987, following the stock market crash then. The fact that stocks can put in such a great performance while rate expectations and bond yields are rising shows confidence in the US economy that is likely to support the USD going forward. Greek stocks also had a fairly good day (+1.5%) after the head of the opposition SYRIZA party said that he wanted a negotiated debt relief solution with the EU and wanted to keep the country in the Eurozone. It seems that as the election approaches, he is toning down some of his more extreme positions.

Oil continued to fall after the Saudi oil minister said OPEC would find it “difficult, if not impossible” to give up market share by cutting production. But he also said he was optimistic about the future, and indeed there’s good reason for him to be. Oil prices for far out in the future – 2020, for example – are rising, because so many companies are cutting their investment plans now. That may not have any impact on output this year or even next year, but it should limit the increase in output several years down the road.

The Bank of Japan kept policy unchanged, as expected. Having surprised the market with a boost in stimulus in October, it will probably be many more months before we see any change from the BoJ. The focus in Japan rather should be on PM Abe’s efforts to reform the economy, the so-called “third arrow” of his economic plans. So far however there aren’t many victories to see there, so the pressure on the BoJ will remain.

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From New Zealand, both ANZ Business confidence for December and credit card spending for November were lower than expected. That didn’t prevent NZD from being the best-performing G10 currency however as commodity currencies recovered. Since New Zealand has little energy in its export basket and is little exposed to Chinese construction, I would expect the currency to perform well as confidence comes back. The only concern is fear of a change in monetary policy there.

Today’s events: During the European day, German PPI for November is expected to fall at an accelerating pace of -1.1% yoy, from -1.0% yoy previously. This would show that the risk of deflation in the Eurozone is continuing or even increasing. The bloc’s current account for October is also to be released.