Morning Report: 22 December 2014

22nd December 2014 By: Admin

GBP Sterling failed to react in any meaningful way to more positive economic data on Friday, sticking within its recent ranges against the US dollar, but maintaining its firmer tone against the euro. Markets were unimpressed with the fact that Public Sector Net Borrowing figures beat expectations, probably because they still showed the deficit almost doubling from last month, to £14.1bn. The figures did still represent a 3.4% annualised reduction in spending, showing that there is an underlying improvement, even if you strip out the £1.1bn windfall for the Treasury from fining banks for rigging the FX markets. Adding to sentiment that the UK economy is on the right track were Realized Sales numbers from the Confederation of British Industry, which surveys around 125 retail and wholesale companies on sales volumes. The survey uses 0 as a separation between sales growth and contraction, so the reading of 60, especially against a forecast rise of 30, bodes extremely well. In light of the positive Retail Sales figures on Friday, and in the absence of any UK data aside from tomorrow’s Current Account figures, we expect sterling to be well-supported this week in an illiquid market.

USD Having broken through fresh two-year lows against the euro on Friday, it seems likely that the US dollar is going to continue to grind away against the single currency over the coming weeks. The demise of the EUR against the USD has long since been anticipated, and with no major data set for release today to give markets any reason to trade in any other direction, the cycle of EURUSD posting fresh lows, following by a slight rise as investors take profit, before falling to further fresh lows, seems set to continue. As a result, the USD is likely to remain bid against most other majors too. It should be noted, however, that with markets notoriously illiquid between Christmas and the New Year, we may still see sharp spikes of USD weakness should any large USD sell orders need to be processed before year end, and as such, for USD buyers it is worth having target orders in above the current rates, even if the trend is for the dollar to keep strengthening.

EUR An EU summit on Friday failed to materially change markets expectations regarding the overall direction of the Eurozone economy, despite an agreement to create a €315bn strategic investment fund, which is designed to stimulate job growth and, in turn, sluggish economies. The plan calls for the new European Fund for Strategic Investments to be in operation and approving new projects by mid-2015, using EU seed money to leverage up to 15 times more funds from private sources. However, with the fund still needing approval from EU legislators, and Lithuanian Premier Dalia Grybauskaite dismissing the plan as “creative accounting”, the euro continues to look like a battered heavyweight entering the latter rounds of a fight long-since lost as we head to year end. Despite the overall economic situation actually having improved in Europe since the last real crisis of confidence in 2012, the situation now actually looks structurally worse for the medium term value of the euro, and as such we expect the single currency to remain under pressure over the coming sessions.

CAD The Canadian dollar saw volatile trading on Friday, with poor inflation data causing a sharp sell-off, after having initially regained some lost ground against the US dollar. For the fourth week in a row the loonie has now lost value overall, with speculation that crude oil prices will remain under pressure only serving to bleaken the outlook for the Canadian economy. Indeed, with crude oil, which is the nation’s biggest export, now at its lowest level since 2009, it is difficult to see CAD regaining much ground before year end, despite how sharp its losses have proven to be already this year.

UK news

  • FT. UK employers look set to engage more staff amid pay rise caution: Employers plan to hire more staff in every region of the UK next year but they are still cautious about pay, with only a small minority offering above-inflation wage rises.
  • FT. House prices falling in a third of UK, study shows: House prices are falling in almost a third of the UK’s local housing markets, according to research findings that suggest tighter mortgage lending rules have cooled the market boom.
  • Daily Mail. No need for further measures to stimulate UK economy, says BoE policymaker as fall in inflation does not pose risk of deflation: The sharp fall in UK inflation does not pose a risk of deflation and there is no need to take more measures to stimulate the economy, a Bank of England policymaker said in a newspaper column on Sunday.
  • Reuters. UK public finances improve in November, helped by forex fines: Britain’s public finances improved in November helped by fines paid by banks for a foreign exchange scandal, giving some respite to Chancellor George Osborne as he tries to show voters he can keep on bringing down the deficit.
  • Telegraph. Job rich recovery to unlock broadest pay growth since 2006, says CBI: Confederation of British Industry says bigger rises in permanent work will pave way for stronger pay growth.