Many financial centers in Asia and Europe are on holiday today, and those that are open, are experiencing a minimum of activity. Turnover may pick up briefly in the North American morning, but conditions will remain thin and only those who need to transact will.
The foreign exchange market is becalmed, leaving the US dollar narrowly mixed in uneventful and light turnover. The euro has been confined to less than a third of a cent range. Yesterday it briefly dipped below its 20-day moving average for the first time since the ECB met earlier this month. It remains in the upper half of the two-range ($1.08-$1.10) that has confined prices most of this month. There was only one close outside of this range (December 9) since that ECB meeting.
Australia, New Zealand, UK markets closed for Boxing Day. After rallying last week, oil prices are off 2%, base and precious metals lower. European core and peripheral bond markets are highs, with yields slipping mostly 2-3 bp. There is no end to the political uncertainty in Spain, but Spanish 10-year bonds are matching regional performance.
The US dollar traded heavily in the holiday-shortened week. It slipped against all the major currencies. The recovery in commodity prices, the new stimulus Chinese officials suggested, and the relatively high yields conspired to help lift the dollar-bloc currencies. Them and the Swedish krona fared best. Sterling, the Swiss franc, and Japanese yen managed to eke out small gains.
China’s Central Economic Work Conference is responsible for setting the annual GDP target. Although it was not formally announced, President Xi previously indicated that the goal for the economy to expand by around 6.5% a year through 2020. More telling than the GDP target is the intentions expressed in the new slogan: flexible monetary policy, forceful fiscal policy. For Chinese officials, these are not ends in themselves but means to another end.
The election in Spain did not lift the uncertainty but re-redoubled it. Given the outcome, it is difficult envision a majority government. Purely looking at the numbers, a coalition between the Popular Party and the Socialists is simplest solution. It is like Pasok and the New Democracy in Greece and the Christian and Social Democrats in Germany.
The broad interpretative framework we developed since late 2014, one that centers the de-synchronization of the major economies, will retain its usefulness into the New Year and beyond.
The Federal Reserve standing pat after winding down their open-ended asset purchase operations (QE3+) characterized the first phase of divergence. This occurred while many central banks from high-income countries, including the Eurozone, Japan, China, Canada, Australia, New Zealand, Sweden, and Norway eased policy.
Laying the Groundwork for 2016
The dollar rose against all the major currencies over the past week. The divergence meme we have emphasized has continued to unfold. The ECB eased policy at the start of the month. Less than 48 hours after the Fed hiked rates, the BOJ tweaked its asset purchase program to sustain it.
Holiday-thin markets make for more treacherous conditions than usual. The news stream lightens, and participation will fall off until January 4.
The US dollar is firmer against the euro, sterling and yen, but within the ranges seen before the weekend. The greenback is softer against the dollar-bloc currencies after early gains were unwound.
After much hemming and hawing since mid-year, the Federal Reserve is finally poised to raise rates for the first time in nearly a decade. Indeed, given the speeches by the leadership and the economic data, especially the labor market readings, the failure to raise rates would likely be more destabilizing at this juncture than lifting them.
