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Equity markets managed to hold their ground yesterday, surrendering only a modest amount of territory by the time to closing bell rang, able to ward off the pessimistic undertones permeating through markets as a result of the sharp drop in the CNY and the Bitcoin exchange MtGox going dark by closing all customer transactions.   The fundamental data released south of the 49th  parallel muddied the waters slightly, with mixed economic results leading to some choppy price action throughout the day.   Single-family home prices rose slightly more than forecast according to the Case-Shiller report for December, but Consumer Confidence dropped by the most in 4 months for December, paring earlier investor optimism as the reading slid to 78.1.   The S&P finished it session down by 0.13%, with an interesting late day dump that caused stocks to diverge from their usual correlation to the VIX which was also hit with a strong offer tone to drop the cash contract south of the 14% level.   USDCAD picked itself off its overnight lows to grind higher throughout the North American session, with Loonie weakness edging the pair back into the high 1.10s after the developments in China and soggy demand for commodities struck down those currencies correlated to global growth.

While the Chinese renminbi story remains on the forefront of investor’s minds, the overnight session was a little calmer for equity markets.   With the Shanghai Comp managing to sneak into the green and close up by 0.35% this suggests that investors are taking the view that the recent volatility in the CNY has been engineered by the People’s Bank of China to discourage speculative demand for the domestic currency, and precautionary step ahead of widening the trading band.   In addition, the government has tried to downplay the recent price action in USDCNY, with SAFE (state administration of foreign exchange) stating the fall in CNY is normal compared to other markets.   While SAFE is right in respect to other emerging market currencies that have seen wild price swings of late, the renminbi moves are quite significant when compared to the usual size of the fixings from the central bank, and will continue to be a story that investors will be keeping an eye on over the next month.

In other emerging markets things were not as tranquil, with Russian President Vladimir Putin ordering an urgent drill to test the combat readiness of Russia’s armed forces across western Russia.   There were concerns over whether after the camera’s from the Olympics had packed up, Russia would suddenly wake up to the issues in Ukraine and take a more proactive stance, especially after Russian officials had criticized the West of interfering with the sovereignty of Ukraine.   The flexing of Russia’s military muscles and the sounds of war drums growing louder has sparked some nervousness in the region, with USDRUB increasing by 0.8% as investors cut exposure to the Rouble.

Heading further West in Europe, a fairly quiet session has been punctuated by central bank chatter from both the ECB and BoE.   The second estimate of GDP for the UK was released this morning, coming out in-line with the first estimate at 0.7%, with household expenditure and business investment being the biggest contributors to Q4 growth in the region.   The GDP figures have done little to affect the pound this morning, although Cable is slightly weaker after a smattering of members on the Monetary Policy Committee reiterated they had no intention of raising rates anytime soon, guiding the pair into the lower bound of its overnight trading range in the high-1.66s.   The EUR is also generating some modest offer tones against the USD, unable to hold on to earlier gains after rumors hit the wires that there would be no consensus within the governing council of the ECB for the March meeting, and that negative deposit rates could send a   problematic signal to money markets.   We feel these remarks are slightly premature considering the important data points to come  on Thursday  and  Friday, with the market reacting in similar fashion not wanting to amass any overly long EUR positions before the data is released, pinning EURUSD into the low-1.37s.    

Looking ahead to remainder of the session, the lone piece of North American tier-one data on the docket is New Home Sales for the US over the month of January.   If existing home sales from last week were any indication of what could potentially materialize, we are likely to expect a softening for new single-family homes sold during the month.   That being said, market participants have witnessed a slew of disappointing housing data for the month of January recently, making us predict that the market is relatively well-positioned for a miss in New Home Sales today, confirming overall feeble sector performance for January and chalking up the weakness (rightly or wrongly) to a temporary weather effect that kept buyers on the sidelines last month.   Therefore, we would expect the greater risk to market participants is a upside surprise that deviates from the median analyst estimate, leading to some short-covering on the USD and buying interest in equities.   Expectations are for the reading to hit right around the 400k mark, slightly lower than the 414k that was registered in December; make sure to speak to your dealing teams around positioning heading into the release, as market sentiment towards the housing industry in January has definitely ebbed lower.

For corporations that actively trade the EUR, Thursday’s morning data will be an important lead in to the flash CPI estimate for the zone that is due  on Friday.   Money supply growth and private loans for the common-currency bloc over the month of January are set to drop  tomorrow, with both readings expected to see a slight pick-up from the dreary levels witnessed to end 2013.   The M3 money supply is forecast to grow by 1.1% on an annual basis, while private loans are forecast to stem the acceleration of their declines and only fall by an annualized reading of 2.1%; both of which would be welcome developments for the European Central Bank.   In our opinion loans issued to consumers and businesses in the private sector are where the EZ is struggling to generate any momentum on the growth front, and while not talked about as much as CPI, is one of the main indicators the ECB will likely be keeping an eye on in the coming months.   Stronger than expected readings for both releases should help ease some of the pressure on the ECB to take a more accommodative stance on monetary policy at their next meeting; however, we feel that further action from the ECB will be warranted at some point in the future, with any progress in the aforementioned data points being marginal at best.   While the EUR has put in a solid run against the American dollar since mid-January, the pair’s failed attempt to break 1.3800 signals buying conviction could be waning, and a short-term top may be close to being established.   A break of the 1.3700 level to the downside would jeopardize the upward trend channel that has been in place for the majority of 2014, leading to further losses for the EUR; however, even though we are fundamentally skeptical of the EUR’s value in the 1.38-1.40 region, a deeper correction south of the mid-1.35s would need to take place before the technical and fundamental pictures align to more cohesively signal trouble for the common-currency.

Further reading:

Canadian dollar retreats on poor investment data

EUR/USD – Drifting Continues As German Consumer Confidence Rises