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Currency gyrations ruffle investor feathers
International Perspective - January 26, 2018
By Anne D. Picker, Chief Economist


Global Markets

Equities were dominated by fluctuations in currency markets as the U.S. dollar tumbled against all of its major counterparts. The indexes hurt the most by the machinations in the currency markets were those such as the FTSE that contain exporters reliant on currency values for profits. The continuing earnings announcements of major firms also influenced the trend in equity markets. On the week, gains ranged from 2.8 percent (Hang Seng) to 0.1 percent (SMI). Losses ranged from 0.8 percent (FTSE) to minus 3.75 points (Taiex).


IMF revises its global growth forecasts up

The International Monetary Fund, in an update of its World Economic Outlook, upwardly revised its forecast for world economic growth in 2018 and 2019 saying the sweeping U.S. tax cuts were likely to boost investment in the U.S. and help its main trading partners as well. However, it also added that U.S. growth would likely start weakening after 2022 as temporary spending incentives brought about by the tax cuts begin to expire. The tax cuts would likely widen the U.S. current account deficit, strengthen the U.S. dollar and affect international investment flows. IMF Managing Director Christine Lagarde pointed to a "troubling" increase in debt levels across many countries and warned policymakers against complacency saying now was the time to address structural deficiencies in their economies.


Pointing to the United States and China, the IMF forecast global growth of 3.9 percent for both 2018 and 2019, a 0.2 percentage point increase from its last update in October. The IMF also upwardly revised its growth forecasts for the euro area, especially for Germany, Italy and the Netherlands "reflecting the stronger momentum in domestic demand and higher external demand". However, it cut its forecast for Spain's growth for 2018 by 0.1 percentage point saying political uncertainty linked to the Catalonia region's independence push was expected to impact business confidence and demand. The IMF upwardly revised its Japanese growth forecast to 1.2 percent this year and 0.9 percent in 2019. It maintained its projection for Britain's growth at 1.5 percent this year. China's economy was expected to expand 6.6 percent this year and slow to 6.4 percent in 2019.


Bank of Japan maintains the status quo

As universally expected, the Bank of Japan left its policy interest rate at minus 0.1 percent where it has been since January 2016 indicating that the BoJ's divergence with other major central banks will continue. The target level for the 10-year JGB yield remains around zero percent. The monetary policy board again voted 8 to 1 in favor of this decision.


At his post-meeting press conference, Governor Haruhiko Kuroda noted that corporate earnings were rising and household income has improved. But inflation still remains far below the 2 percent target. Kuroda said the Bank would continue its monetary easing in order to reach the 2 percent goal as soon as possible. At present, the consumer price index excluding fresh food has stagnated around 0.9 percent on the year and excluding both energy and fresh food, the CPI is up a meagre 0.3 percent. However, he quashed market speculation that the BoJ would reverse course sooner than expected. The yen weakened following Kuroda's remarks.


Kuroda previously stoked market speculation for an early cutback on its ultra-loose monetary policy when he raised the issue of the "reversal rate" — the level at which excessively low interest rates start to hurt the financial system and cause the effects of monetary easing to reverse. The speculation resurfaced when the BoJ in early January reduced its purchase offers for JGBs with 10 to 25 years until maturity, as well as for those with 25 to 40 years remaining, by ¥10 billion. Although the BoJ continues to state a goal of buying about ¥80 trillion in government bonds every year since the autumn of 2016, in reality the BoJ has only been buying as many as it needs to keep 10-year bond yields close to zero. Actual purchases last year were ¥56 trillion. Some market participants regard this scaling back of purchases as "stealth taper" of its asset purchases. The BoJ insists this interpretation is incorrect.


European Central Bank sits tight

As widely anticipated, the European Central Bank maintained its monetary policy stance — the benchmark refi rate stayed at zero percent while the rates on the deposit and marginal lending facilities remain at minus 0.40 percent and 0.25 percent respectively. As outlined at last October's meeting, planned net asset purchases remained at a monthly €30 billion through at least September.


There was no modification to forward guidance which has the ECB expecting key official interest rates to remain at their present levels for an extended period of time and well past the horizon of the net asset purchases. The Bank also restated its preparedness to increase the asset purchase program in terms of size and/or duration should the economy underperform. This will disappoint the Council's hawks and market participants hoping for a less accommodative message given the accelerating upswing in the Eurozone real economy.


There was little new of note in ECB Chief Draghi's press conference although, not surprisingly, he did touch on recent exchange rate volatility which he said needs monitoring. Economic risks are still seen as broadly balanced. His apparent calm about euro strength sent the currency to its highest level in more than three years in expectation that a policy shift was looking closer.


The strength of the euro was recognised when Mario Draghi mentioned exchange rate volatility quite early in the introductory statement. He said that the recent surge in euro was a source of concern and asserted that an interest rate increase was unlikely this year. He also said that "several ECB policymakers expressed concern" over the recent statements from the U.S. and such worries were "broader than the exchange rate, but the status of international relations right now." The euro climbed higher against the dollar following the ECB announcement, which applied further pressure to shares of European exporters.


In March, the ECB will release new staff forecasts and might provide the ECB Governing Council with the opportunity to announce some changes to the forward guidance and maybe provide some hints as to what will happen after September.


Global Stock Market Recap

  2017 2018 % Change
Index Dec 29 Jan 19 Jan 26 Week 2018
Australia All Ordinaries 6167.3 6119.3 6164.75 0.7% 0.0%
Japan Nikkei 225 22764.9 23808.1 23631.88 -0.7% 3.8%
Topix 1817.56 1889.74 1879.39 -0.5% 3.4%
Hong Kong Hang Seng 29919.2 32254.9 33154.12 2.8% 10.8%
S. Korea Kospi 2467.5 2520.3 2574.76 2.2% 4.3%
Singapore STI 3402.9 3550.4 3567.14 0.5% 4.8%
China Shanghai Composite 3307.2 3487.9 3558.13 2.0% 7.6%
India Sensex 30 34056.8 35511.58 36050.44 1.5% 5.9%
Indonesia Jakarta Composite 6355.7 6490.9 6660.62 2.6% 4.8%
Malaysia KLCI 1796.8 1828.8 1853.92 1.4% 3.2%
Philippines PSEi 8558.4 8915.9 9041.20 1.4% 5.6%
Taiwan Taiex 10642.9 11150.9 11147.10 0.0% 4.7%
Thailand SET 1753.7 1821.3 1828.88 0.4% 4.3%
UK FTSE 100 7687.8 7730.8 7665.54 -0.8% -0.3%
France CAC 5312.6 5526.5 5529.15 0.0% 4.1%
Germany XETRA DAX 12917.6 13434.5 13340.17 -0.7% 3.3%
Italy FTSE MIB 21853.3 23749.2 23856.99 0.5% 9.2%
Spain IBEX 35 10043.9 10479.5 10595.40 1.1% 5.5%
Sweden OMX Stockholm 30 1576.9 1630.6 1612.63 -1.1% 2.3%
Switzerland SMI 9381.9 9509.8 9515.56 0.1% 1.4%
North America
United States Dow 24719.2 26071.72 26616.71 2.1% 7.7%
NASDAQ 6903.4 7336.4 7505.77 2.3% 8.7%
S&P 500 2673.6 2810.3 2872.87 2.2% 7.5%
Canada S&P/TSX Comp. 16209.1 16353.5 16239.22 -0.7% 0.2%
Mexico Bolsa 49354.4 49695.6 51065.490 2.8% 3.5%


Europe and the UK

European equities were mixed last week with the SMI and CAC advancing thanks to Friday's gains. The FTSE lost 0.8 percent on the week while the DAX was 0.7 percent lower. The higher pound sterling and euro against the U.S. dollar pressured exporters. The SMI was up 0.1 percent while the CAC edged up 2.64 points. Investors' attention was focused on the European Central Bank's policy announcement and President Mario Draghi's press conference on Thursday. However, they also paid attention to the flow of remarks at the World Economic Forum in Davos, Switzerland especially in the currency markets.


On Friday, Bank of England Governor Mark Carney told the audience in Davos that interest rates in the UK over the next year will depend on the negotiations with the EU regarding Brexit. He also said earlier that the "deeper the relationship" with Europe in the future, the better for the UK economy. Speaking on a panel on the global economy, Carney said that given the ability of the UK economy to grow, the exchange rate and trade costs would be determined by the negotiations with the EU27 and the outcome would determine the level of interest rates.


Asia Pacific

Most Asian equity indexes advanced on the week with those in Japan and Taiwan the exceptions. Stocks in Japan were addled by the ever climbing value of the yen against the U.S. dollar. The Nikkei lost 0.7 percent while the Topix retreated 0.5 percent. The Taiex slipped 3.75 points. During the week, investors parsed the Bank of Japan monetary policy statement along with rhetoric from Davos and merchandise trade (exports disappointed) and inflation data (up an annual 0.9 percent for the second month).


Speaking on a panel at the World Economic Forum in Davos, BoJ Governor Haruhiko Kuroda said inflation was finally getting close to the BoJ's target of 2 percent and that there would be a slight pickup in inflation expectations. The comments fueled speculation that the Bank could be prepared to scale back the pace of its quantitative easing. The comments seemed somewhat at odds with the comments Mr Kuroda gave at his press conferences following the BoJ's most recent meetings in December and January when he reiterated the central bank's full commitment to easy monetary policy.


The Hang Seng rose for a seventh consecutive week, closing above the 33,000 level for the first time and extending a stretch of record finishes as robust inflows continued to chase local equities higher amid an upbeat outlook. The Hang Seng Index ended the week 2.8 percent higher. The seven-week streak matches its longest stretch of weekly gains since May 2015.


After rallying Tuesday after the U.S. government ended its shutdown Monday, shares were mixed as news of U.S. tariffs on washing machines and solar panels sparked fears of a global trade war. Investors also monitored political developments in Europe after Germany's Social Democrats voted to enter coalition talks with Chancellor Angela Merkel's government and French President Emmanuel Macron said it would be possible for Britain to secure a bespoke trade deal if the U.K. accepts certain "preconditions".



The U.S. dollar tumbled against all of its major counterparts including the yen, euro, pound sterling, Swiss franc and the Canadian and Australian dollars. Contributing to the currency's weakness were comments made in Davos by U.S. Treasury Secretary Steven Mnuchin Wednesday. Mnuchin's endorsement of a weaker dollar as a boost to U.S. trade on Wednesday heaped more pressure on an already sliding currency. The comments were a break from previous U.S. administrations where Treasury secretaries were enthusiastic about a strong dollar policy. Mnuchin expanded on his remarks about the dollar from a day earlier Thursday saying he wasn't concerned about short-term fluctuations and that there are economic pros and cons to where the exchange rate now is. The euro strengthened as ECB President Mario Draghi highlighted the region's robust pace of growth after policy makers kept interest rates unchanged.


The pound sterling climbed for the week and on Friday after fourth quarter gross domestic product grew faster than expected. This combined with the view that the hit from the Brexit vote was not as bad as expected. Sterling was already higher before the data and rose further on the day. Sterling also strengthened against the euro and continued to enjoy a strong rally so far in 2018, helped by the broad selloff of the U.S. dollar and despite U.S. President Donald Trump saying on Thursday said he ultimately wanted a strong currency.


Selected currencies — weekly results

2017 2018 % Change
Dec 29 Jan 19 Jan 26 Week 2018
U.S. $ per currency
Australia A$ 0.779 0.800 0.812 1.5% 4.1%
New Zealand NZ$ 0.709 0.728 0.736 1.1% 3.8%
Canada C$ 0.796 0.800 0.812 1.5% 2.0%
Eurozone euro (€) 1.194 1.223 1.242 1.5% 3.9%
UK pound sterling (£) 1.344 1.387 1.415 2.1% 5.3%
Currency per U.S. $
China yuan 6.534 6.404 6.328 1.2% 3.2%
Hong Kong HK$* 7.816 7.817 7.818 0.0% 0.0%
India rupee 64.081 63.846 63.543 0.5% 0.8%
Japan yen 112.850 110.720 108.670 1.9% 3.8%
Malaysia ringgit 4.067 3.939 3.871 1.8% 5.1%
Singapore Singapore $ 1.338 1.321 1.307 1.0% 2.3%
South Korea won 1070.630 1066.000 1064.010 0.2% 0.6%
Taiwan Taiwan $ 29.775 29.378 29.092 1.0% 2.3%
Thailand baht 32.696 31.856 31.345 1.6% 4.3%
Switzerland Swiss franc 0.979 0.9628 0.934 3.1% 4.8%
*Pegged to U.S. dollar
Source: Bloomberg


Indicator scoreboard


January's flash composite PMI was 58.6, up 0.5 points from December — a 139-month high. Compared with December, January's report showed a much better balance and while strength was again most apparent in manufacturing, its outperformance was notably less marked this time. While the flash manufacturing PMI shed a full point to (a still very solid) 59.6, its service sector counterpart gained a point to 57.6, a 125-month peak. The buoyancy of the headline reflected a healthy and broad-based rise in new business, the second largest since July 2007. Backlogs were also up again despite the steepest rise in aggregate headcount since September 2000 and against this backdrop, business confidence recorded its most optimistic reading in eight months. The core countries had another very good month with the flash composite output index up 0.1 point at 59.7 in France and down just 0.1 point at 58.8 in Germany. At the same time, the rest of the region recorded the strongest activity rate since July 2006.



January ZEW survey indicates that analysts remained very upbeat about the German economy with January's assessments of current conditions and the outlook were both significantly more optimistic than in December. The current conditions measure advanced 5.9 points to 95.2. This was the fifth increase in the last six months and put the index at a new post-Great Recession high. At the same time, expectations increased 3 points to 20.4, more than reversing December's 1.3 point decline, to stand at an 8-month peak.


January Ifo reading was 117.6, reversing December's drop to match November's record high. January's rebound was wholly attributable to an improvement in the current conditions component. This measure rose 2.2 points to 127.7, more than 11 points above its level a year ago and also a new all-time peak. By contrast, expectations were a little softer, slipping 1 point to 108.4, their lowest since September. It may be that the ongoing political uncertainty prompted by last September's inconclusive federal election has had a negative effect. At a sector level, morale was up in manufacturing (33.2 after 31.8) and wholesale (23.5 after 22.6) but down in construction (17.8 after 18.3) and retail (15.1 after 15.8). However, in both categories where sentiment deteriorated the latest level was still historically firm.


United Kingdom

December claimant count unemployment climbed 8,600 following an upwardly revised 12,200 gain in November. The latest increase was enough to lift the jobless rate from 2.3 percent, the value posted every month since last April, to 2.4 percent, a level not seen since February 2015. The ILO statistics found unemployment in the three months to November falling 3,000 from the previous three months, leaving its version of the jobless rate unchanged at 4.3 percent. Employment jumped 102,000, its largest advance since May-July 2017 and sufficient to raise the employment rate by 0.2 percentage points to 75.3 percent, equaling the record high. Additionally, vacancies climbed 17,000 to 810,000, a new record peak. However, average annual earnings growth in the three months to November was 2.5 percent, unchanged from the previous period. Excluding bonuses, the rate was 2.4 percent. As a result, real regular pay over the same three months declined an annual 0.5 percent which, after a 0.4 percent drop in the three months to October, simply implies a still tighter squeeze on household budgets.


Fourth quarter first estimate gross domestic product was up a quarterly 0.5 percent after increasing 0.4 percent in the previous quarter and its strongest mark since the fourth quarter of 2016. However, negative base effects saw the annual gain in total output slide from 1.7 percent to 1.5 percent, extending the downward trend that began in the second quarter of 2017 and equaling the weakest reading since the second quarter of 2012. The quarterly advance was driven by services where output expanded 0.6 percent. This mainly reflected 0.8 percent increases in transportation, storage &communications as well as in business services and finance. Government was up 0.4 percent but distribution, hotels & restaurants rose just 0.1 percent, their worst performance in three quarters. Overall industrial production increased 0.6 percent within which manufacturing gained an impressive 1.3 percent for a second successive quarter. The sector was held in check by a 3.9 percent decline in mining and quarrying where a shutdown in the key N. Sea Forties oil pipeline was a significant factor. Meantime, construction (down 1.0 percent) contracted for a third straight quarter while agriculture forestry and fishing declined 0.4 percent.




December merchandise trade surplus widened to ¥359 billion from ¥112 billion in November. Exports increased 9.3 percent on the year, slowing from 16.2 percent in November. Imports advanced 14.9 percent on the year, also slowing from 17.2 percent. Weaker export growth was broad-based with external demand slowing from most of Japan's major trading partners. Japanese exports to China were up 15.8 percent on the year in December, down from 25.1 percent in November, with demand also weakening elsewhere in the region. Exports to the United States slowed from 13.0 percent in November to 3.0 percent in December while exports to the European Union also moderated, up 11.4 percent after increasing by 13.3 percent previously. Weaker imports growth was driven by manufactured goods and electrical machinery. For the year 2017, Japan recorded a surplus of ¥3.0 trillion, down from a surplus of ¥4.0 trillion in 2016. Exports rose 11.8 percent, up from a drop of 7.4 percent the year before, but imports growth rebounded more strongly from a drop of 15.8 percent to an increase of 14.0 percent.




Retail sales increased for the third consecutive month in November, rising 0.2 percent after a revised October gain of 1.6 percent. This was lower than the expected 0.8 percent monthly increase. Sales were up in 6 of 11 subsectors, representing 37 percent of total retail trade. On the year, sales were up 6.5 percent. After removing the effects of price changes, retail sales in volume terms increased 0.3 percent on the month after rising 1.5 percent the month before. Following a 3.6 percent gain in October, sales fell at motor vehicle and parts dealers (down 3.6 percent) in November. Lower sales at new car dealers (down 5.3 percent) accounted for the decline at the subsector level, more than offsetting gains at other motor-vehicle (8.8 percent) and used-car (3.7 percent) dealers. Higher sales at gasoline stations, electronics and appliance stores and general merchandise stores offset lower receipts at new car dealers. Excluding motor vehicle and parts dealers, retail sales rose 1.6 percent. Receipts at gasoline stations (5.9 percent) were up for the third time in four months, largely reflecting higher prices at the pump. Electronics and appliance stores posted a 12.9 percent sales gain, on the strength of promotional events such as Black Friday coinciding with the timing of new product releases in November. General merchandise stores (1.8 percent) increased for the third consecutive month. Sales at clothing and clothing accessories stores advanced.


Bottom line

Both the Bank of Japan and the European Central Bank maintained their respective monetary policies. Interest rates were left unchanged along with asset purchase programs. Most economic data in Europe indicated continuing strengthening of the economy. In Japan, December consumer price index data disappointed yet again.


The Federal Reserve Open Market Committee (FOMC) meets on January 30 and 31 with no policy change anticipated. It is chair Janet Yellen's last meeting with Jerome Powell taking over on February 3. The FOMC will also reflect the annual rotation of voting privileges among District Banks. It is also a data-packed week in Europe and Asia along with the U.S. Among the many indicators to be released will be the final manufacturing PMIs globally. Also expected are fourth quarter initial estimates of gross domestic product for the Eurozone and France.


Looking Ahead: January 29 through February 2, 2018

Central Bank activities
Jan 31 United States Federal Reserve FOMC Announcement
The following indicators will be released this week...
Jan 30 Eurozone EC Business & Consumer Confidence (January)
Gross Domestic Product (Q4.2017 flash)
France Consumption of Manufactured Goods (December)
Gross Domestic Product (Q4.2017 flash)
Jan 31 Eurozone Harmonized Index of Consumer Prices (January flash)
Unemployment Rate (December)
Feb 1 Eurozone Manufacturing PMI (January)
Germany Manufacturing PMI (January)
France Manufacturing PMI (January)
UK Manufacturing PMI (January)
Feb 2 UK Construction PMI (January)
Asia Pacific
Jan 30 Japan Household Spending (December)
Unemployment Rate (December)
Retail Sales (December)
Jan 31 Japan Industrial Production (December)
Australia Consumer Price Index (Q4.2017)
China CFLP Manufacturing PMI (January)
Feb 1 Japan Manufacturing PMI (January)
China Manufacturing PMI (January)
India Manufacturing PMI (January)
Feb 2 Australia Producer Price Index (Q4.2017)
Jan 31 Canada Monthly GDP (November)
Industrial Product Price Index (December)


Anne D Picker is the author of International Economic Indicators and Central Banks.


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