The War of the Printing Presses

•  Markets began the week quietly as Martin Luther King Jr. Day was observed in the U.S.. AUDUSD range traded, finding support at 1.0500 and resistance at 1.0570. AUDEUR climbed from a low of 0.7850 to 0.7913 at time of writing. The GBP continued its weak run, AUDGBP climbed from 0.6556 to 0.6656 at time of writing.
•  The Bank of Japan (BoJ) raised its inflation target from 1% to 2% as called for by Prime Minister Shinzo Abe and widely expected by currency markets. The BoJ also announced open ended asset purchases to start in 2014 in further moves to devalue their currency. The announcement was largely priced in to the market, although expectations were for an immediate expansion of asset purchases. AUDJPY has appreciated 8.4% over the past month and 12.9% over the past three months.
• The BoJ’s actions have been criticised on many fronts. Questions have been raised as to the effectiveness of currency devaluation in encouraging growth via exports. Since central banks worldwide have been pursuing easy monetary policy, the real effects of such devaluation are diminished; put simply, if everyone does it, it’s like no one is doing it. The move was also criticised as a politically fuelled decision by a supposed independent body.
• Chinese fourth quarter GDP growth was released on Friday at 7.9%. This figure was slightly above the expected 7.8% and lent the AUD and other risk assets support into the weekend. After bottoming in the third quarter of 2011, the data illustrates the stabilisation of Chinese growth after being dampened by the Euro crisis. Supplementary data was also released that beat expectations; namely, Industrial Production growth at 10.3% and Retail Sales growth at 15.2%.
•  The HSBC Flash Manufacturing PMI, a measure of manufacturing sector activity, will be released on Thursday. The figure, indicating expansion when over 50, was 51.5 last month and will be an important driver of risk sentiment. Additionally, PMI data will be released for French, German and Euro area manufacturing and service sectors. The recent strength of the EUR may be tested if these figures are worse than expected; particularly German Manufacturing.

• The RBA will meet on the 5^th of February for their first monetary policy decision of 2013. Interest rate swap markets are pricing around a 45 percent chance of a rate cut to 2.75%; a historically low level. Given recent data releases, while conditions are softening, they do not appear severely worse than expected and hence the AUD has remained supported.
• Last Thursday, Australian employment data was released showing a softening of conditions over December. Seasonally adjusted total employment declined by 5,500 and the unemployment rate ticked up slightly to 5.4% from 5.3%.

• Delving further into the data we find full-time employment decreased 13,800 and part-time employment increased 8,300. The RBA has mentioned softening labour market conditions throughout its 2012 easing cycle, and the substitution of full-time jobs for part-time are a classic symptom of such softening.
• Considering September, October and November’s figures all delivered much better than expected figures, the data were not severely negative and probably not enough to prompt an RBA reaction in February.

• Australia’s quarterly Consumer Price Index (CPI), the key measure of inflation, was released today at 0.6% from 0.7% expected for the quarter. This places the yearly figure at 2.3%, comfortably within the RBA’s 2 and 3 percent target.
• Earlier in the January, Building Approvals grew at a worse than expected 2.9% in December and Retail Sales were down 0.1% from 0.3% growth expected. Next Friday, the Producer Price Index (PPI) is released. The figure measures inflation for producers’ and therefore is a guide of future consumer inflation.
• The RBA gave indications that the December rate cut would conclude the easing cycle for now. The most recent releases of data, although weaker, do not indicate a significantly sharper decline and, in our view, should not prompt a change in the RBA’s stance for February.

• Please see below for specific currency commentary.

• The U.S. was closed for trading on Monday as Martin Luther King Jr. day was observed and President Obama was inaugurated for his second term in the White House. As a result, AUDUSD trading was fairly quiet for the first part of the week. Perking up to a high of 1.0570 on the fore mentioned Bank of Japan announcement, Australia’s CPI figure lead the AUD lower to be 1.0537 at time of writing.
• The Philly Fed Manufacturing Index was released on Friday at -5.8. The survey of managers gauges business conditions in the U.S.
• Looking forward, AUDUSD will likely be driven by the HSBC Flash Manufacturing PMI mentioned above and U.S. GDP and employment figures released late next week.

• The EUR consolidated its recent strength this week, after touching a low of 0.7850, the AUD clawed back some ground to be 0.7913 at time of writing.
• On other crosses, EURGBP stabilised just above 0.8400 from last week’s low of 0.8300 and EURCHF fell from its high of 1.2571 to 1.2372, as money flowing out of safe havens and back into the EUR took a breather.
• The ZEW German Economic Sentiment Indicator was released on Tuesday at 31.5 points. After reading negative for much of 2012, the figure has been on a sharp rise and now sits at its highest level since May 2010. The indicator measures experts’ opinions on the economic conditions in Germany, the mainstay of the Euro zone.

• PMI data will be released for French, German and Euro area manufacturing and service sectors. The recent strength of the EUR may be tested if these figures are worse than expected; particularly German Manufacturing.

• AUDGBP continued its strong run, climbing from 0.6556 to 0.6656 over the week. The GBP weakness is fuelled by funds flowing back into EUR as the debt crisis subsides.
• U.K Preliminary GDP, the first of three quarterly measurements of GDP growth, will be released on Friday. After a strong third quarter figure ended the double dip recession, Friday will be the first chance to see whether such growth will be sustainable. Expectations are bearish, with -0.1% expected, a poor figure will cement the broad decline of the GBP recently.