Forex Weekly Review and Outlook − Focus on FOMC and BoE Minutes in a Quiet Week

Forex Weekly Review and Outlook

Focus on FOMC and BoE Minutes in a Quiet Week

Sterling was hit hard across the board last week on renewed expectation for further rate cut from BoE after dovish Inflation Report. Canadian dollar also corrected sharply, following retreat in oil prices. Carry trade unwinding, though calmed down a bit, still dragged down commodity currencies. Though, the yen ended the week mixed, weakening against Euro and dollar. Swissy was more impressive this time as it strengthened broadly. The economic calendar is relatively light this week, with market holiday in US and Japan. Nevertheless, FOMC minutes and new projections as well as BoE minutes will be featured, together with important data from US and Canada.
During the week, Fed announced the plan to improve its transparency to the markets. Firstly, the committee will double of the frequency of publishing its projections from twice a year to four times a year. Secondly, in addition to core PCE, GDP and unemployment, Fed will include headline PCE in the projection forecasts. Thirdly, the forecast horizon will be extended to three year from two. Even though a formal inflation target will be not adopted at this moment, the act is viewed as a step towards such adoption. Bernanke's emphasis on headline inflation raised some doubts on whether Fed will cut rates in Dec as markets expected. And there is further doubt after comments from Kroszner and Poole. Kroszner said that economic indicators in the coming months will reflect a "rough patch" However, that is not enough to guarantee additional rate cuts. Poole said that Fed must lead, but not follow the markets on rate policy. Even though subprime problem take time to resolve, he doesn't expect a recession yet and he doubts the need for more rate cuts. The first report will be released along with the FOMC minutes this week and will be closely watched.
Both CPI and PPI reports showed increased inflation risks in US. Headline CPI climbed from 2.8% yoy to 3.5% yoy with core CPI up from 2.1% yoy to 2.2% yoy in Oct. The usually volatile PPI was up from 4.4% yoy to 6.1% yoy with core PPI up from 2.0% yoy to 2.5% yoy. Retail sales rose 0.2% mom with ex auto sales rising 0.2% mom in Oct, not far from consensus expectation. Pending home sales surprised on the upside, recovering by 0.2% in Sep. Both NY State and Philly Fed survey beat expectation in Nov. However, industrial production missed expectation and dropped -0.5%, worst in 6 months. Even though TIC capital flow rebounded back to positive territory in Sep, the 26.4b inflow was much weaker than consensus of 70b. Jobless claim was also sharply higher from 319k to 339k.
There were also news that UAE central bank is considering to "review" the dollar peg due to its weakness. Though the plan is "not to drop" it, but it may reduce to "a basket which will consist of more dollars, but not totally 100 percent"
From Eurozone, ZEW economic sentiments deteriorated sharply further to -32.5, reaching a 15 year low and much weaker than expected -12. ZEW president Wolfgang Franz said that the depreciation of dollar is putting a burden on German exports and economic development may lose "considerable speed". Eurozone Sep industrial production dropped -0.7% mom, dragging yoy rate to 3.5%, also missed expected of -0.2% mom, 4.7% yoy. Though, Q3 GDP data was solid, showing 0.7% qoq, 2.6% yoy growth comparing to expectation of 0.6% qoq, 2.5% qoq. Oct HICP is confirmed to be 2.6% yoy.
Sterling had a tough week. Initially, Sterling rode on stronger than expected inflation data in Oct. CPI accelerated from 1.8% yoy to 2.1% yoy vs consensus of 1.9% yoy. RPI also climbed from 3.9% yoy to 4.2% yoy vs expectation of 4.1%. PPI input accelerated sharply from 6.5% yoy to 8.6% yoy. Output prices climbed from 2.8% yoy to 3.8% yoy. The turning point was the BoE Inflation Report, which forecasts that inflation in UK will settle at its target of 2.0%, after being pushed to above 2.0% by energy prices, assuming at least on rate cut in 2008. This prompted increased expectation that BoE will cut rates in as soon as Q1. Sterling was further pressured after disappointing retail sales which showed -0.1% contraction in Oct, dragging yoy growth from 6.0% to 4.4%.
Price actions in the Japanese yen remained larger affected by carry trades. BoJ left rates unchanged at 0.50% as widely expected after a mere fortnight of their last meeting. The vote split was again 8-1, with ultra-hawk Atsushi Mizuno continued to be the sole dissenting vote in favor of an interest rate rise, the same as in the past six meetings. Q3 GDP data showed a strong rebound in strength with annualized GDP growth up from -1.6% to +2.6%, with 0.6% qoq growth, much stronger than consensus expectation. The data eased concern that the Japanese economy has slipped into recession but provides no solid case for near term hike from BoJ yet.
Swiss Franc was relatively quiet last week. Zew index deteriorated further from -16 to -28.9 in Nov. Retail sales slowed from 3.8% yoy growth to 3.0%.
RBA Monetary Policy Statement confirmed its tightening bias. Inflation is expected to be around 3.25% until Jun 08, up from prior estimate of 3.00%, exceeding the bank's target range of 2-3% and provides the justification for last week's rate hike. However, GDP growth forecast was revised down to 3.75% for the current fiscal year. Also, the statement noted that sentiment in global financial markets "remains fragile." After all, even though further tightening is still expected from RBA down the road, traders has pared back expectations for an immediate hike in Dec as RBA could wait-and-see first the development in the financial markets first. New Zealand retail sales was much stronger than expected at first glance, rising 1.0% mom in Sep. However, the strong data was mainly due to soaring energy and food prices. Sales excluding inflation, a measure of volumes, rose by 0.2% only and is just inline with expectation.