Global deflation continues
Reserve banks around the world have either cut or held their prime lending rates in the past few weeks in attempts to seek out some growth in what will probably be one of the lowest global growth years in decades. Amongst those that have cut are Australia, Russia, India, China, Canada and Turkey. Whilst some nations that have held rates steady in recent weeks include South Africa, New Zealand and Japan. Brazil is the only BRIC nation to have raised interest rates in recent times.
All eyes are on US for indication as to when they may raise rates; as a result long-positions on USD have seen it strengthen significantly against peers in recent months.
Meanwhile, in Europe they can’t drop rates anymore so instead stimulus measures such as Quantitative Easing are being implemented.
US $ has made strong gains with the US economy seemingly the only growing economy out there at the moment, the dollar strengthened to an 11 year best against the EUR on Monday last week at 1.1097.
Last week’s FOMC’s decision to keep rates on hold was almost entirely expected and priced in, the transition of US monetary policy is still the hottest financial topic of debate out there.
In early trade this week the dollar has lost a bit of ground off the back of poor Personal Consumption Expenditure but is expected to be a net-gainer for the week; US economic news this week includes Initial Jobless Claims on Thursday and Non-Farm payrolls on Friday.
EURUSD is down by close to 6% for the year but is trading sideways so far this week, whilst EURGBP down roughly 4% and EURCHF down 12.5% for the year. The market is closely watching the situation in Greece where the newly elected anti-austerity government has signalled they will be renegotiating the existing debt funding arrangement when it expires at the end of February.
Currently trading around 1.1320, technical resistance is expected at 1.1460 and support at 1.1110.
A busy data calendar for the UK this week, the highlight of which is the BOE’s Official Bank Rate Decision on Thursday, the market has almost entirely priced in a no-change decision with analysts mainly looking for signs of future action. The talk through the better part of last year was all towards a rate hike early in 2015 but a deflationary global environment and lower energy prices have dampened the outlook for the UK economy.
Data this week includes Construction PMI on Tuesday, Services PMI on Wednesday, the BOE’s rate decision on Thursday and finally the Trade Balance on Friday.
GBP is currently trading around 1.5020 to USD with technical resistance at 1.5235.
The RBA have unexpectedly cut their Cash Rate to a record low of 2.25% in a bid to lift the sluggish Aussie economy, this caused AUDUSD to depreciate to a 5 year low at 0.7650, analysts predict another rate cut this year. The real problems for the economy however are suppressed global commodity prices and inconsistent growth figures out of China.
Currently trading around 0.7655 to USD, downside risk remains the consensus and the Aussie is likely to have a tough time regaining lost ground in the near future.
The RBNZ left rates unchanged at 3.5% last week, a largely expected move. The Kiwi is expected to lose ground to the dollar this week as investors favour the greenback.
Technical support is expected at the 0.7160 level and resistance at the 0.7430 mark. NZDUSD currently trading around 0.7195.
Following a no-surprise no-change rate decision from the SARB’s MPC last week the Rand lost ground against the majors through the end of the week, bringing its performance back in line with other risky currencies. However the market has been defiant in its purchases of our risky Rand this week, with the ZAR appreciating strongly this morning. The bullish sentiment is expected to be short-lived, important as always to note that it is the global markets pushing the ZAR around as there are no fundamentals locally providing support.
It will be a volatile time for ZAR, especially towards the end of the week with the UK’s BOE rate discussion and the payroll data out of the US.
SA PMI data is out on Wednesday and Business & Consumer Confidence figures are out on Thursday. The Gross and Net currency reserves numbers are released on Friday.