USD, EUR, CHF, JPY: The strong US labour market report on Friday provided considerable support for the US dollar. However, it was not quite sufficient to compensate for the effects of increased risk aversion. During the course of the day the US dollar lost out against the currency safe havens EUR, JPY and CHF.
In the case of EUR and CHF that makes sense as the Fed demonstrated last year that it does consider the turbulence in China in its decision making process. Following the turbulence on the Chinese stock market in the summer it had initially refrained from hiking interest rates in September. The same of course applies to the ECB in the end. It too had reacted to the turbulence in China and the resulting EUR strength at the end of the year. However, from the market’s point of view it pursued a much less expansionary monetary policy than expected. Since then it has become questionable whether the doves on the ECB council would still be able to implement more expansionary measures. As the market does not expect any further aggressive steps to weaken the EUR on the part of the ECB it therefore makes sense that EUR is currently in demand as a currency safe haven. The same applies for the CHF. As we have been pointing out for a while, the Swiss National Bank has limited possibilities of reacting to pronounced CHF strength. Due to the possibility of holding cash, further rate cuts would barely have an impact, nor would unlimited FX market interventions be credible long term. That means that CHF remains an attractive currency safe haven.
Also in the case of the Japanese yen I can quite understand why it is currently the most attractive currency safe haven. As the Bank of Japan (BoJ) seemed extremely relaxed about its inflation target recently the market seems to consider the likelihood of further expansionary steps to be smallest here. However, I would not be quite so certain whether this assumption really is correct. It is difficult to imagine that the BoJ will allow an excessively strong JPY to ruin all its previously proclaimed success in fighting low inflation without putting up any fight at all. However, as long as the BoJ is not able to convince the market that it is willing to react to an excessively strong currency in one way or the other, JPY will remain the king amongst the currency safe havens.
NOK: A further Norges Bank rate cut is more or less a fait accompli. At its last meeting it had more or less announced a rate step for March. The only condition is that the Norwegian economy will record weaker growth as it expects. And in view of the continued fall of the oil price it very much looks as if that would be the case. The only thing that could potentially prevent it from a rate step is inflation getting out of control. That means that today’s December inflation data is worth taking into consideration. As Norges Bank has so far shown considerable tolerance towards an inflation rate above its target the data would have to surprise notably on the upside to prevent Norges Bank from a further rate cut though. But strong data might at least provide a brief surge in NOK.
HUF, TRY: The CEE majors published November industrial output data last week: the data portrayed a noticeable deceleration in growth for most countries; Hungary and Turkey in particular recorded pull-backs, with Hungarian production down 1.4% m/m and decelerating from 12.7% yoy (wda) to 7%; Turkish production declined by almost 1% m/m, slowing to 3.5% yoy against 4.3% consensus expectation. We expect Hungarian GDP growth in particular to decelerate over the coming year after enjoying a nice boom during 2015. That said, month to month readings can be misleading: the underlying trends in Hungarian and Turkish manufacturing are best viewed as seasonally-adjusted levels, which you see in chart xx — both countries have enjoyed manufacturing recoveries over the past couple of years, with Hungary catching up especially vigorously. In light of chart xx, the pull-back of November 2015 is not a significant event. Going forward, we expect Turkish growth to accelerate because of the new government’s pro-growth policies, whereas Hungary is likely to moderate through 2016 as EU-funded infrastructure projects take a break. As far as USD-TRY and EUR-HUF are concerned, we expect steady increase through 2016 because of the low/negative real interest rate in these countries.
CNY: China’s PBoC set USD-CNY lower by 10bps to 6.5626 this morning, compared with previous closing rate of 6.5888. The fixing rates were significantly lower than the official closing rates in the past two trading days, hinting that China’s central bank intends to kick in some stabilization factor into the market, following the wild session in the first week of this year. It appears to us that China would hold back the pace of CNY depreciation as the new RMB index dropped to below 100 for the first time last Friday since it was launched on 11 December 2015. Indeed, facing the unexpected market volatility, the Chinese authorities vowed that it is crucial to maintain a stable currency against a basket of currencies. We still need some time to check the credibility of China’s new currency basket, but we do think that it is not of China’s interest to exacerbate the view of a fast CNY depreciation given concerns of capital outflows. However, as on Friday the market did not fully accept the low fixing rate and trades USD-CNY above 6.58 this morning. By providing a fixing rate not only significantly below previous days official closing rate but also below the entire previous days trading range, the PBoC risks once more making the fixing a pure political price. This would be another hint, that Beijing is increasingly struggling with accepting the market forces