December 21, 2014 / 11:38 PM / 3 years ago

IFR Markets ForexWatch Asia Regional Daily Briefing

SYDNEY, Dec 22 (IFR) - 
    
ECB's Constancio sees negative inflation but not deflation. Reuters reports that
ECB VP Constancio said in Germany's WirtschaftsWoche magazine interview he
expected EZ inflation to turn negative in the coming months but that if this was
just a temporary phenomenon, he did not see a risk of deflation saying: "You'd
need negative inflation rates over a longer period for that. If it's just a
temporary phenomenon, I don't see a danger." 
In early December the ECB forecast 0.7% inflation for 2015 but Constancio said
oil prices had fallen by an extra 15% since then and that, while this should
support growth and so drive up inflation in the longer term, it created a tricky
situation in the short-term.
 
Constancio said there had been no decision on what extra measures the ECB would
take to bring about monetary easing next year, adding that the bank would, in
early 2015, assess the effectiveness of measures it had taken this year. He said
the ECB needed to employ all monetary policy tools at its disposal, adding that
the bank must act if inflation was too low to maintain its credibility and so
would need to use channels it had not touched before. He said quantitative
easing was "totally legal" and the ECB did not rule out what was legal.
 
The Constancio comments aren't anything new and aren't likely to shift the
growing expectation that the ECB commence QE in early 2015 and perhaps at the
January meeting.
 
Headlines from Friday Night
* Fed's Kocherlakota: Fed should have signaled to buy more bonds if inflation
stays low; Should have vowed to keep rates at zero so long as inflation outlook
stays below 2%;  Fed is creating 'unacceptable' downside inflation risks
* Fed's Williams: market's view of when lift-off might occur are 'relatively
reasonable'; Policy lift-off will be driven by progress on jobs & inflation
outlook; We will see 2015 inflation well below 2%; We are getting closer to
thinking about pros & cons of raising rates-BBG
* US Dec KC Fed mfg 9.0 vs prior 9.0
* US Dec KC Fed composite index 8.0 vs prior 7.0
* CA Nov CPI m/m -0.4% (f/c -0.2%, prior +0.10%); y/y 2.0% (f/c 2.2% prior 2.4%)
* CA Nov BoC CPI core m/m -0.2% (f/c+0.1% prior 0.3%); y/y 2.1% 
* CA Oct retail sales m/m 0.0% (f/c -0.2% prior 0.8%)
* CA Oct retail sales ex-auto m/m 0.2% (f/c 0.2% prior 0.0%)
* MXN CB: Decision to hold rates at 3.0% was unanimous; majority of board
members think risks to growth have deteriorated-Minutes
* Russian CB: Raises limit on forex swap to $10bln from $2bln per day for Dec 19
* S&P revises Ukraine sov outlook to negative from stable; Current rating CCC-
* GB Dec GfK consumer confidence -4 vs prev -2. -1 exp 
* DE GfK consumer confidence 9.0 vs prev 8.7. 8.8 exp 
* DE Nov Producer prices 0% m/m, -0.9% y/y vs prev -0.2%/-1.0%. -0.2%/-1.1% exp 
* GB Dec CBI distributive trades +61 vs prev 27. 30 exp 
* ECB considers weaker countries to bear larger risk burden in any QE - Reuter's
sources  
 
Themes
* The main themes across asset markets on Friday were resilient investor risk
appetite as Wall Street withstood profit taking early in the session before
closing the day with a gain; a strong rally in key commodities with NYMEX Crude
surging over 5.0% and ongoing USD strength as short-term US yields moved higher
in anticipation of Fed tightening before Q3 2015.
* Market moves on Friday were relatively modest (with the exception of Crude),
as there wasn't and key data and the approach of the holiday season kept many
investors sidelined.
* Wall Street was slightly in the red during the morning, but buyers emerged in
the afternoon to ensure one of the best three-day rallies on Wall St in years.
* The nexus between the oil price and Wall Street continued to weaken - as Wall
Street was in negative territory when NYMEX Crude was around 4.0% higher.
* The move up on the oil price on Friday was due to short-covering ahead of the
weekend and NYMEX Crude closed at 57.13 - 5.0% higher from Thursday's close.
* Key commodities made a strong close to the week - with NY Copper rising 1.2%
and iron ore jumping 2.2% to 69.50. Gold closed the day virtually unchanged
around 1196.
* USD moved higher across the board as short-term US yields firmed up on Friday.
* Curve flattening strategies dominated the price action in the Treasury market
- with the 2-year US Treasury yield rising 1bps to 0.64% while the 10-yr yield
eased 5bps to 2.16%.
* The emerging view in the bond market is that a Fed rate hike in mid 2015 will
help contain/weigh on longer-term inflation. 
* The move up in the USD was led by a break above 119.50 in USD/JPY as real
money funds were tipped as the main buyers.
* USD/JPY traded as high as 119.63 before closing at 119.51 - up 0.6% from
Thursday's close.
* EUR/USD traded to a fresh 2-year plus low at 1.2220, as a consensus builds
that the ECB will announce full-blown QE as early as the Jan meeting. Comments
from the ECB's Praet intensified dovish ECB expectations - saying the ECB will
not hesitate in taking action in their price stability mandate is at risk.
* The steep fall in the 10-yr Spanish bond yield this week illustrates the
growing consensus ECB QE is close at hand. The 10-yr Spanish bond yield closed
at an all time low 1.70% - down 18bps from the previous week's close.
* EUR/USD closed at 1.2226 - down 0.5% on the day and completed a bearish
outside week reversal.
* The US dollar index (DXY) traded as high as 89.65 - the highest level since
2006 - before closing at 89.59 to complete a bullish outside week reversal. The
DXY is approaching major resistance at 89.90 - which is the 38.2 fibo of the
entire 2001 trend high at 121.02/2008 trend low at 70.79.
* The rise in key commodities and generally buoyant risk appetite resulted in
commodity/risk currencies outperforming JPY and EUR in particular. AUD/USD
closed at 0.8141 down 0.3% from Friday's close; NZD/USD closed at 0.7747 down
0.2% on the day while the USD/CAD rose 0.2% to 1.1601.
 
Wrap-up
US dollar looks like it will close the year on a strong note after a few hiccups
caused by the steep fall in the oil price and the knock-on effect of pushing US
yields lower. EUR/USD will likely remain pressured in the short-term, as the
market is becoming ever more convinced the ECB will announce full-blow QE at
their meeting in late January. It wouldn't shock to see the ECB disappoint and
procrastinate as they iron out conditions for a sovereign bond buying program -
one that Germany remains opposed to - but for the immediate term at least the
market is more comfortable selling EUR/USD.
 
Risk appetite remains elevated, as equity investors got the "Santa Claus rally"
they were hoping for and suddenly the sub-60 oil price doesn't seem to be an
issue anymore. Some analysts feel that oil is ready to bottom and push higher -
while others feel that even if oil continues to slide it won't result in serious
contagion in the high-yield market that would threaten cutting off key avenues
of credit and lead to a squeeze on all things leveraged. The sanguine view of
what is happening in the oil market is a marked change from one week ago.
 
The elevated risk appetite and falling volatility should support carry trade
strategies and limit losses in AUD, NZD and CAD while at the same time encourage
JPY selling - as it is used as a funding currency for carry trades.
 
The market should be relatively quiet next week - even though the thinning
liquidity could see some choppy price action. John.Noonan@thomsonreuters.com 
 
ASIAN CURRENCY OUTLOOK
 
USD/AXJ closed on Friday somewhat mixed content to run its own race in the face
of general US Dollars against the majors at least. The sharply recovering crude
price was a one off in an otherwise general lackluster affair to close out the
week> EUR weakness prevails with market continuing to build short into year end
and ahead of the January ECB where many expect full blown QE. The market is now
long US Dollars a very good levels and will not be put off by a bit of
volatility in thinning year-end markets. The USD/AXJ complex was a mixed bag
last week but central banks activity in certain pairs endured the focus remained
on the topside with China US Dollars shortages making people take notice.
 
USD/KRW traded a 1097.7-1103.5 range in Asia on Friday; last at 1102. The Kospi
closed up 1.7%.
 
USD/SGD traded a 1.3129-1.3173 range in Asia on Friday; last at 1.3161. The
Straits Times closed up 1.1%.
 
USD/MYR traded a 3.4685-3.4795 range in Asia on Friday; last at 3.4795. The KLCI
closed up 0.94%.
 
USD/IDR traded a 12490-12545 range in Asia on Friday; last at 12500. The Jakarta
Interbank Spot Dollar Rate (JISDOR) was set at 12500. The IDX Composite closed
up 0.6%.
 
USD/PHP traded a 44.72-80 range in Asia on Friday; last at 44.725. The PSE index
closed up 1.4%.
 
USD/THB traded a 32.82-86 range in Asia on Friday; last at 32.855. The Set
closed down 0.15%.
 
USD/TWD traded a 31.412-48 range in Asia on Friday; last at 31.47. The Taiex
closed up 1.36%.
 
USD/CNY was set in Asia on Friday at 6.1205 slightly higher than the previous
6.1195 fix. OTC USD/CNY traded a 6.2133-6.2316 range; last at 6.2202. OTC
USD/CNH last at 6.2225 - range 6.2170-6.2300. The 1-yr NDF was last quoted in
Asia at 6.3600-6.3620. The Shanghai Composite closed up 1.7%.
 
USD/INR traded a 62.99-63.34 range in Asia on Friday; last at 63.26. The Sensex
closed up 0.9%.
 
Economic Data Releases (GMT) 
22 Dec 00:30 TW Jobless Rate 
22 Dec 08:00 TW Export Orders  
22 Dec 09:00 MY Reserves 
 
Looking Ahead - Events, Other Releases (GMT)
Nil
 
The week ahead - Some GDP data and then Happy Holidays
It will be a light week for key events and key data. Tuesday will be a fairly
busy day with GDP data to be released in the US, UK and Canada. Japan will be
fairly busy with the BOJ Monthly report on Monday followed by the BOJ Minutes on
Wednesday. Japan CPI; IP and Retail Sales will be released on Thursday, but the
rest of the world will be closed for Christmas. Have a merry one!
 
A closer look at the equity market
* The London FTSE closed up 1.23% led by energy and mining - with FTSE Energy
sector rising 2.75% and the FTSE mining sector gaining 2.7%. German DAX eased
0.25% to take a breather from huge gains Wednesday/Thursday. French CAC edged
0.8% lower; Milan closed 0.4% lower and Spanish IBEX ended the day down 0.3%.
* For the week London FTSE rose 3.9%; German DAX gained 2.0%; French CAC soared
3.2%; Milan gained 2.1% and the Spanish IBEX rose 2.15%.
* Wall Street was slightly in the red during the morning, but buyers emerged in
the afternoon session to ensure one of the best three-day rallies on Wall Street
in years. Profit taking selling in the last hour resulted in only a modest gain
on Friday - with the energy sector leading the way with a 3.1% gain.
* The nexus between the oil price and Wall Street continued to weaken - as Wall
Street was in negative territory when NYMEX Crude was around 4.0% higher.
* For the week the Dow gained 3.0%; S&P rose 3.4% and NASDAQ gained 2.4%.
* The VIX index closed at 16.49 slightly down from Thursday's close at 16.81.
For the week the VIX fell 21.5% from last week's close at 21.08.
* MSCI LATAM Equity index closed up 1.5% on Friday and a weekly gain of 3.8%.
 
A closer look at the commodity market
* The crude oil price remained volatile - as bargain hunters swooped to push
Brent Crude pushed back above 60 to close at 61.38 up 3.6% on the day. NYMEX
Crude rallied 5.1% to 57.13.
* Key commodities made a strong close to the week - with NY Copper rising 1.2%
and iron ore jumping 2.2% to 69.50. Gold closed the day virtually unchanged
around 1196.
* For the week Brent Crude eased 0.8% even though there was plenty of volatility
in between. NYMEX Crude fell 2.2%; Gold fell 2.1%; Lon Copper eased 1.4%; NY
Copper fell 1.3% and iron ore gained 1.2%.
 
A closer look at the fixed interest market
* The combination of improving risk appetite and anticipation of ECB QE in Q1
2015 sent peripheral EZ bond yields lower on Friday.
* The 10-yr Spanish bond yield closed at an all time low 1.70% - down 4bps from
Thursday's close and 18 BPS from the previous week's close. The 10-year Italian
bond yield closed unchanged at 1.96%; the 10-yr German Bund yield eased to BPS
to 0.59% and the 10-year UK Gild yield eased 2bps to 1.85%.
* Curve flattening strategies dominated the price action in the Treasury market
- with the 2-yr yield rising 1bps to 0.64%; 10-yr yield eased 5bps to 2.16%.
* The emerging view in the bond market is that a Fed rate hike in mid 2015 will
help contain/weigh on longer-term inflation.
 
John Noonan's Technical View as at Sunday 21 December 2014   

Equities
S&P500:  Last week was difficult for trend traders, as the S&P started to trend
lower at the start of the week before a vicious reversal higher negated all of
the bearish signals. The S&P closed below key support at 1,980 on Tuesday (very
bearish) but that was negated by a big rally on Wednesday. The moving average
studies aren't proving any signals regarding trends, but the May 12 all-time
high at 2,079 is resistance and a break above would be bullish. {Last 2,070}
 
Nikkei remains in a period of choppy consolidation. Technical picture started to
turn negative, but the fierce rally at end of last week negated those signals.
Nikkei appears poised to test the Aug 12 trend high at 18,030 and a break above
that level would be bullish. {Last 17,621}
 
ASX started to trend lower early last week, but the strong rally at the end of
the week has put the moving average studies in a conflicting/neutral state. The
5, 10 and 20 day moving averages are aligned in a bearish formation, but all
three are pointing higher - which is bullish. The ASX managed to hold above key
support at 5,122 but now faces tough resistance between 5,345 and 5,435. The 50%
retracement of the 5.502/5,142 move comes in at 5,346; the 50-dma comes in at
5,358; the 61.8 of the aforementioned move comes in at 5,395; the 100-dma comes
in at 5,421 and the 200-dma comes in at 5.440. A clear break above 5,450 is
needed to get bullish again. {Last 5,338}
 
Commodities
Spot Gold: The short-term trend higher in gold proved to be very short-term
indeed. The fall and close below key support around 1,200 (where the 20-day and
50-day moving averages converged) negated all bullish signals that emerged over
the previous two weeks.  Support is found at the 61.8 fibo of the 1,142/1,238
move at 1,179 and a break below that level suggests another test of 1,130/1,145
is likely. {Last 1,196}
 
Lon Copper: The trend lower in copper resumed last week as the 5-day, 10-day and
20-day moving averages are lined up in a bearish formation and pointing lower.
The price action isn't convincing however and a break above the 20-dma at 6,440
would suggest more sluggish consolidation is ahead. {Last 6,400}
 
Brent Crude is trending lower, but the trend is showing tentative signs of
fatigue. The price action has ceased making consecutive lower daily lows and the
5-dma is starting to flatten out. A break above the descending 20-dma (around 67
on Monday) would warn a correction higher is commencing. Support has formed at
58.50 and a break and close below that level would suggest the trend lower has
resumed.  {Last 61.38}
 
FX
EUR/USD: After a period of very messy consolidation, EUR/USD appears poised to
resume trending lower. It must be said there is a pattern of trends forming in
EUR/USD only to be negated by periods of sideways/choppy price action. A break
above the 20-dma around 1.2395 would suggest more trendless/sideways chop.  The
target for the current trend lower is the 2012 low at 1.2042. {Last 1.2226}
 
USD/JPY isn't trending at the moment - but the break and close above the 61.8
fibo of the 121.86/115.56 move at 119.45 on Friday was a bullish event. Support
is found at the 20-dma at 118.80 and while that level holds a test of the trend
high at 121.86 is possible {Last 119.51}
 
AUD/USD is trending lower and the trend is showing little sign of waning
momentum. A break and close above the 10-dma at 0.8220 would warn the trend
lower is fading and a break and close above the 20-dma around 0.8350 would
suggest a short term bottom is in place at 0.8107. A break below 0.8100 targets
the May 2010 low at 0.8066. {Last 0.8141}  John.Noonan@thomsonreuters.com

OVERNIGHT RANGES---------------------------INTRADAY RANGES -- Close 2200GMT
NDFS OPEN   HIGH   LOW     LAST        VOL CURRENCY   HIGH     LOW    CLOSE
IDR  12600  12540  12525   12530-12540 N/A USD/JPY   119.63  118.82  119.51
INR  63.52  63.80  63.62   63.72-75    N/A EUR/USD   1.2303  1.2220  1.2226 
KRW  1101   1102   1099    1102-1102.5 N/A EUR/JPY   146.73  145.95  146.03
MYR  3.4830 3.4880 3.4660  3.4830-60   N/A GBP/USD   1.5681  1.5605  1.5618
PHP  44.85  44.83  44.78   44.80-82    N/A USD/CAD   1.1635  1.1567  1.1601
TWD  31.45  31.50  31.455  31.49-51    N/A AUD/USD   0.8193  0.8123  0.8141
CNY  1-mth  6.1460 6.1445  6.1440-60       NZD/USD   0.7796  0.7736  0.7747
CNY  6-mth  No     Trades  6.2580-00       USD/SGD   1.3181  1.3129  1.3149
CNY  1-yr   No     Trades  6.3610-30       USD/THB    32.90   32.82  32.875 
 
Equities  Close   Change  %Change  UST(Yields)    Close    Previous
DJIA      17807      +29    +0.16  10-year        2.16%      2.21%
S&P 500    2071      +10    +0.47  2-year         0.64%      0.63%
NASDAQ     4765      +17    +0.35  30-year        2.75%      2.82%
FTSE       6545      +79    +1.22  Spot Gold($) 1195.90    1199.00
DAX        9787      -24    -0.25  Nymex          56.52      55.11
Nikkei    17621     +411    +2.39  Brent          62.15      59.90
    

 (Reporting by John Noonan, Catherine Tan and Peter Whitley)

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