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Daily Insights - December 19, 2014

Risk sentiment ends the week on solid footing

  • The Russian authorities’ actions have helped stabilize the RUB, but it remains vulnerable to speculative pressures, in our view. A calmer environment has contained contagion to other EM assets, with high yielders with better macro fundamentals, such as the BRL, IDR and INR, recovering more strongly in the past two days.
  • European data have been mixed today, but the prospect of further easing by the ECB easing and other central banks is keeping currencies under pressure. UK consumer confidence dropped in December. French business confidence for December paused after a bounce last month. German consumer confidence and Italian industrial orders beat expectations. European currencies are generally weaker reflecting their central banks’ dovish bias given the prospect of further ECB easing. The Swiss National Bank announced negative interest rates yesterday, while dovish comments by a Polish central banker are pushing EUR/PLN to its highest level since September 2013.
  • The BoJ left monetary policy intact, as expected, but upgraded its view of exports, housing investment and industrial production. We have sharply lowered our core CPI forecasts, to reflect lower oil prices. We expect core CPI y/y inflation to continue to ease, bottoming at 0.5% in mid-2015.
  • With the FOMC behind us and signs of Russia and EM markets stabilizing, markets could start winding down towards year-end, leading to more subdued volatility amid thinner liquidity. Data/events today are likely to have less impact on markets. Chicago Fed President Evans and Richmond Fed President Lacker will both deliver speeches, which might provide some insight into the recent debate at the FOMC. Canada’s CPI report will likely show a firmer core inflation (consensus: 2.4% y/y, last: 2.3%). The main focus for next week will be US home sales (Mon), GDP growth and PCE inflation (Tue); France and UK GDP growth (Tue); Turkey’s monetary policy decision (Wed) and Japan’s IP and CPI on Thu.


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