Too busy enjoying the holidays to keep tabs on forex market movements? Don’t worry! I’ve got the latest market themes covered in this edition of Piponomics. Here’s what happened in the past few days and how price action might fare during the start of this year:
1. Improving U.S. fundamentals
A couple of days before Christmas, the Greenback got an early present when the U.S. economy reported a significant upgrade in its Q3 2014 GDP reading. The report was revised higher from the previous 3.9% estimate to a whopping 5.0% growth figure!
Analysts had already been expecting a pretty solid upgrade to 4.3% and were blown away by the much stronger than expected final GDP reading, which marked its fastest pace of expansion in more than a decade. The gains were buoyed by stellar consumer spending figures, boosted mostly by the consistent improvements in the U.S. labor market and falling oil prices.
With that, talks of a Fed rate hike sometime this year once again dominated the airwaves, providing more support for the U.S. dollar. Market participants are expecting to see even stronger data from the U.S. economy in the coming months, which could further support Fed tightening expectations.
2. Further economic weakness in Japan
On the flip side, the Japanese economy printed another round of disappointing economic figures during the last week of December. Inflation continued to slow down, with the Tokyo core CPI falling from 2.4% to 2.3% and the national core CPI dropping from 2.9% to 2.7% in November. Minus the effect of the April sales tax hike, the core inflation reading is down from 0.9% to 0.7% during the period, weighed down by lower oil prices.
Apart from that, industrial production also came in the red, with the November report showing a 0.6% decline instead of the estimated 1.0% monthly gain. Retail sales also showed a bleak 0.4% annual uptick, far below the estimated 1.2% increase and the previous 1.4% rise.
No wonder market watchers are buzzing about further BOJ easing and possibly more economic reforms from the Japanese government. For now though, the Japanese yen still appears to be enjoying a bit of support from risk aversion and downbeat economic forecasts, but this could change if the BOJ takes more action.
3. SNB negative deposit rates
Perhaps one of the biggest surprises towards the end of 2014 was the SNB’s decision to finally implement negative deposit rates. Although many had been calling for some form of easing from the SNB for the past months, some were caught off guard when Thomas Jordan and his men eventually pulled the trigger.
With negative deposit rates, the SNB now charges commercial banks and other financial institutions for leaving some of their cash reserves in the central bank’s vault. This move aims to encourage lending activity, which could then support spending and inflation. Aside from that, negative deposit rates could also lead to currency depreciation, helping the SNB defend its franc peg.
4. Oil price slide
Oil prices had been steadily falling since last year and might continue to do so in the coming months. While some economies such as the U.S. have benefitted from this phenomenon, other countries like Russia and the OPEC nations would rather see an end to these price declines.
Over the past few days, some OPEC members have been urging top cartel officials to announce a cut in production in order to curb supply and boost prices. According to Iran’s Deputy Foreign Minister Hossein Amir Abdollahian, allowing crude oil prices to fall further would be a serious mistake as this would weigh on profits and growth for economies dependent on oil exports.
This could continue to be a major market theme in the coming months, especially if OPEC leaders refuse to take action. On top of putting downward pressure on the positively-correlated Canadian dollar, the oil price slide could also drag other commodities and comdolls lower.
5. Euro zone politics
Another market theme that has emerged recently is that of euro zone political changes, particularly the snap election in Greece. Bear in mind that the confidence vote in early December already weighed on the euro, as this opened up the possibility of Greece being unable to secure more bailout funds.
If there’s one thing you should know about the euro these days, it’s that the shared currency is still highly sensitive to any news regarding debt troubles, even after the worst of the crisis seems to have already passed a few years back. With Prime Minister Samaras unable to draw enough support for the current coalition, a snap election is set to place towards the end of this month and might set the tone for euro forex price action.
Which among these latest market themes are you looking to profit from this month? Share your thoughts in our comment box or cast your votes in our poll below!