Divergence in monetary policy to be continuing theme in 2015

The action Friday showed that divergence in monetary policy, one of the main themes for 2014, will continue apace in 2015. Two senior ECB officials expressed their concern about negative inflation and their determination to use all possible monetary tools, including quantitative easing, to fight the trend. On the other hand, three Fed presidents indicated that the FOMC intends to begin normalizing policy (= raise rates) in the coming year even if inflation hasn’t returned to their 2% target. The divergence drove EUR/USD to a new 2014 low Friday, reminiscent of its 2013 high on Dec. 27th that year. This theme of policy divergence is set to run and run and will continue to push the pair lower next year, in my view.

Oil had a fantastic day, with WTI up 6.3% and Brent up 4.8% from Friday’s opening levels, apparently on comments by the Saudi Arabian oil minister that crude prices will rebound as world economic growth boosts demand. Personally, I think this is the lamest excuse for a rally I’ve ever heard, since most economists continue to downgrade their forecasts for world growth next year and also the world is using less and less oil for each increase in growth. I think market participants have simply decided that enough is enough and prices have fallen too far too quickly. Friday’s Commitment of Traders report shows that speculators increased their long positions in WTI in the week ended Dec. 16th and we can presume they increased them further during the rest of the week. I don’t think the fundamentals for the oil market have changed and I don’t think world economic growth is likely to accelerate so quickly next year, but oil may be in for a temporary rebound after the recent plunge as the market tries to find a new equilibrium price where the increased supply balances the expected lower demand. This is likely to impart increased volatility to the commodity currencies. I wouldn’t be surprised to see the oil-related currencies (AUD, CAD and NOK) rally today – they have vastly underperformed the other G10 currencies in recent weeks.

iron forex_policy

Canada’s CPI

Canada’s CPI rate declined to 2% yoy in November, from 2.4% yoy previously, missing expectations of a decline to 2.2% yoy. But the deceleration in core CPI to 2.1% yoy was even more of a surprise as it had been expected to accelerate. That gives little reason for the Bank of Canada to raise rates any time soon. Moreover, the October retail sales report showed the impact of falling energy prices on the Canadian economy as nominal retail sales were largely flat and sales declined in nine of the ten provinces. USD/CAD jumped briefly to touch our 1.1635 resistance line but fell back immediately and this morning is opening in Europe around 1.1600. The failure of buyers to push the rate higher despite the weak economic data raise concerns over their strength and heightens the possibility of a corrective wave down before they seize control again.

Today’s indicators:

The calendar is relatively light today. During the European day, Eurozone’s preliminary consumer confidence for December is forecast to remain near its previous month’s levels. In Sweden, retail sales for November are expected to remain unchanged from the previous month.

In the US

Eexisting home sales for November. Last week, housing starts and building permits fell in November but the strong revision of the previous figures kept the overall trend consistent with an improving housing market. Thus, the possibility for another strong housing data is high and this could support USD. Chicago Fed national activity index for November is also to be released.

In New Zealand

The trade deficit for November is expected to narrow a bit. This could be NZD-positive.

Rest of the week

Tuesday we get final GDP figures for Q3 from several countries. In France and the UK, the final Q3 GDP data are expected to confirm the preliminary growth figures. In the US, the 3rd estimate of GDP for Q3 is expected to show that the US economy expanded at a faster pace than initially estimated. The 3rd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have remained unchanged from the 2nd estimate. The monthly rate of the Core PCE and PCE deflator for November are also coming out. Canada’s GDP for October is also due out.

On Wednesday, US initial jobless claims for the week ended Dec. 20 is released a day early because of Christmas.

Thursday will obviously be a very quiet day because of the Christmas holiday. The Bank of Japan releases the minutes from its Nov. 18-19 policy meeting, which is not the most recent meeting but rather the previous one. Considering the fact that at their latest meeting they didn’t introduce any new measures, the minutes of the previous meeting shouldn’t make that much of a stir.

Friday should also be a quiet day as many European centers are still out. The focus will be on the usual end-of-month data dump from Japan. Japan’s national CPI for November is forecast to have decelerated a bit, while Tokyo CPI rate for December is expected to have remained unchanged. Slowing inflation should eventually put pressure on the Bank of Japan to loosen further, but that’s a story for next year. At the same time, Japan’s jobless rate and job offers-to-applicants’ ratio, both for November, are expected to have remained unchanged from October. Preliminary industrial production and retail sales for November are also coming out.

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