FX News Today

A tumultuous session in Asia, initiated by China stocks markets closing limit down within the first half an hour of trade, saw the yen extend recent outperformance and the commodity currencies extend recent underperformance. Asian currencies, ex-yen, also went into a tailspin, although most managed to regain poise as the session progressed. AUDJPY, which is a forex proxy of China sentiment, dove to a new four-month low, and AUDUSD a three-month low. The NZD and CAD also fell to new lows. Oil prices dove over 4%, driving Brent crude prices to fresh 11-year lows. The catalyst of the carnage was an accelerated depreciation of the yuan, of 0.5% today, which is the biggest drop since last August.

German Nov retail sales up 0.2% m/m, a tad weaker than expected and bringing the annual rate to 2.3% y/y from 2.5% y/y in October. The three months trend rate was unchanged at 0.2%. Annual rates remain robust and monthly numbers are volatile and subject to sizeable revisions, but on the whole the data confirms that consumption remains underpinned by the improvement in real disposable income on the back of rising wages, low unemployment and low oil prices.

German Nov orders much stronger than expected. Manufacturing orders jumped 1.5% m/m in November, after already rising a very strong 1.7% m/m in the previous month. The robust rise lifted the annual rate to 2.1% y/y from -1.6% y/y and while the three months trend rate remains in negative territory, it improved markedly from -1.3% from -2.9% in the three months to October. The numbers tie in with the better than expected confidence readings and show the German economy on track for ongoing robust growth.

World Bank cut its global growth outlook to 2.9% for 2016, versus the prior 3.3% projection from June. It missed its 2015 estimate of 2.8% on the low side as GDP rose only 2.4% last year, a 5th straight year below 3%. The forecast for Chinese growth was trimmed to 6.7% versus 7.0% previously, while the U.S. expansion was shaved to 2.7% from 2.8%, due in part to the damping effect of the firmer dollar. The Bank also sees a “low probability risk of disorderly” slowing in major emerging markets due to Fed tightening, a firmer dollar, and geopolitical concerns.

FOMC minutes indicated nearly all members believed conditions had been met for liftoff in December, though some noted it was a “close call.” Inflation was a major point of discussion. Overll, the FOMC was “reasonably confident” that the 2% goal would be achieved, though some saw “considerable” risk that price pressures would not build due to the stronger dollar and soft oil prices. Expectations for a gradual policy path was also the general outlook, and there were several reasons for the cautious approach, including maintaining an accommodative stance and the uncertain outlook over inflation. It would also allow policymakers time to assess the economy’s reaction to tightening. But, there were also statements that policy would be be data dependent. There was no clear indication over the likelihood of another hike in March. However, more weak economic reports like the ones so far this year, and increased uncertainty over the inflation trajectory (the worry of several Fed officials), could leave rates on hold.

Main Macro Events Today

• European Unemployment Rate: no change is expected in the European unemployment rate. It is expected to stay at 10.7%.
• BoC Governor Poloz Speech: markets are focusing on the Governor Poloz speech in order to see if the Fed’s rate in December and the continued downfall in the price of crude oil impacts the BoC rate decisions.
• US Continuing Jobless Claims are expected to rise 190k in December vs 217k.

Janne Muta

Chief Market Analyst

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