Apocalyptic Week Winds Down

The resignation of the Pope was followed by a lightning strike on the Vatican. A meteor storm has killed more than 150 people in Russia. UK retail sales collapse in January, falling 0.6% increased of rising 0.5% as the consensus expected. Insult was added to injury as the November and December series were revised lower.

Sterling made a new low for the move, to bring its loss against the dollar since the second of January to 5.6%. How much worse can the news get for the sterling? It is not simply the retail sales report. Most of the economic data has disappointed. 

The economy remains stagnant to worse and fiscal policy remains pro-cyclical. King says more monetary easing can be provided if needed. Hello? Where is the bar? If it is not needed now, under what conditions would it be needed? King welcomed sterling's weakness, suggesting that it was helping the UK, though inflation will likely remain above target for the next two years. 

Sterling is showing some resilience today. It has already traded on both sides of yesterday's range as the North American session gets under way sterling is a bit higher than where they left it yesterday. ?A close above $1.5545, roughly yesterday's high would be a technical constructive development. If sterling cannot sustain downticks on a poor news stream, it is at least flashing a yellow light, warning bears should be cautious. We had suggested a technical objective near $1.53. Sterling has moved within 1% of this target by declining a little less than a dime this year. 

Official comments from the G20 meeting that concludes tomorrow dominates the headlines.  Without the French at the microphones (yet) and aside from Brazil's Mantega, nearly everyone seems to be reading from the same chorus book.   Countries can pursue the monetary and fiscal policies as their domestic economy and political decision making allows.  They should not target foreign exchange prices, which should be determined by the market.  The foreign exchange market needs to be able to clear global trade and capital flows.  At the same time, excessive volatility needs to be avoided.  

This is largely boiler plate stuff and the G20 statement is unlikely to be substantively different that the G7 statement.  Japan will not be singled out as that is not the modus operandi of such G7 or G20 statements.  Many parties besides Japan can be said to have violated the spirit of the general understanding.  In most discussions of currency wars the focus is on the high income countries, yet the reluctance of large current account surplus countries in lower income countries to allow their currencies to participate in the adjustment process is an important part of the underlying tension. 

The dollar slipped to new lows for the week against the yen today, but held last Friday's low set just below JPY92.20.  The euro briefly fell through JPY123 to set a new low for February Indeed, it traded below the 20-day moving average for the first time since the Japanese election was announced on November 15.  The 20-day moving average comes in near JPY123.55.  It appears to have stabilized in the European morning and a move back above that average now may mitigate some of the technical damage.

Meanwhile the euro itself continues to track the short-term interest rate spreads.  The 2-year swap rate or interest rate differential has been moving in the US direction in recent days and at almost 9 bp is the biggest US premium since January 16.  Not that there is a one-to-one correspondence between a specific spread level and a particular euro-dollar rate, we note that on January 16, the euro finished the North American session just below $1.33.