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By Gaurav Kashyap, Head of DGCX Desk, Alpari ME DMCC
US Fed keeps QE3 option open, rates low through 2013
If positive US Q4 earnings and improved sentiments weakened the US Dollar, the FOMC's statement from Wednesday cemented the bearish move of the Greenback. In the announcement, the Fed kept rates unchanged between 0.00% and 0.25% but more alarmingly for US Dollar bulls, pledged to keep rates exceptionally low until 2014 (revised from their previous stance to keep rates exceptionally low until 2013).
Targeting the US labour market and the housing sector, the Fed stated that to support a stronger recovery the Committee "expects to maintain a highly accommodative stance for monetary policy." The comment left the door open for QE3 measures which were cheered by US markets with funds flowing into equities & higher yielding assets.
With additional easing measures bringing more liquidity (and as a result more US Dollars) into the US economy, the US Dollar tanked across the board and dropped to its lowest level in months.
Risk moods were also on a high following some rather robust tech earnings from Q4 - honourable mention goes to tech giant Apple who this week announced a whopping EPS of $13.87 on a net income of $13.1bn from the last three months of 2011. Apple shares gained 6.2% following the earnings announcement and took the company's market cap to a staggering $415bn, dethroning ExxonMobil as the largest US company in terms of market value.
The other headline piece of data from the US, was Friday's Q4 GDP expectations. The data showed that the US economy grew at 2.8% (missing expectations of 3.0%) during what many expected to be a robust fourth quarter for the world's largest economy. Personal consumption also dropped to 2.0% (exp 2.4%).
EU finance ministers hold Greek debt deal talks
Across the pond, EU finance ministers kicked off the week with their first FinMin meetings of 2012 to discuss the pending Greek debt deal and the private sector's involvement in any restructuring.
With negotiations ongoing, the topics of discussion include the required voluntary participation rates, swapping of existing bonds with newer bonds of longer maturities as well as what the role of the ECB would be in any debt swap deal. Also of note out of Europe was the confirmation that Iran would be placed under sanctions from exporting energy products to the EU. With the markets largely expecting such a move, Crude prices actually sold off, but the WTI contract closed the week at 99.56.
Reserve Bank of India reduces cash reserves ratio requirement
And finally, this week saw the Reserve Bank of India keep policy rates unchanged and announced a reduction in the cash reserve ratio requirement to 5.5% (lower than the expected 6.0%). The readjusted CRR, the amount of deposits that banks must keep deposited with the RBI Indian markets, is a move which increases liquidity and promotes growth in the nation and is a reversal of the actions over the past two years in a bid to restrict inflation which saw the RBI hike rates from 5.75% up to 8.5%.
The Indian Rupee and Indian equity markets responded very positively on the news. The INR shed almost 2.00% against the US Dollar this week to reach its strongest levels since November. Similarly, the Bombay Stock Exchange gained 3.3% in trading this week, and closed at a two month high of 17233. It was the fourth consecutive week of gains for the USD/INR pair which has dropped 7.30% since the start of 2012. The strengthening of the Indian Rupee has seen the Indian debt and equity markets benefited from strong in-flows from foreign institutional investors. In the first three weeks of January, FIIs have invested $1.56bn in Indian equities and an additional $29.5bn in Indian debt.
Week ahead: looking to US, China manufacturing data
Looking at the week ahead, tremendous event risk to drive pricing - along with the ongoing Greek negotiations which will continue to drive market sentiment, we turn our focus to Wednesday's manufacturing data out of China (Chinese PMI Manufacturing at 0100 GMT - expected at 49.6) and the US (ISM Manufacturing at 1500 GMT - expected at 54.5).
This will lead up to the all important US jobs reading on Friday (150K exp). Friday's jobs data will be particularly important considering December's figure (200K act v 150K exp) were perhaps overinflated as they were supported by a bump in temporary hiring which came as a result of the busy holiday season. We saw a downward revision to November's reading last month, and we can expect to see more downward revisions to December's reading in the range of 150K-160K when the number releases on Friday.
Staff
