Talking Points:

Yen Rose vs. Majors as Stocks Sank in Asia, Pound Underperformed
Euro Unlikely to Find Lasting Support from German Inflation Pickup
US Dollar May Rise if ISM Data Bolsters QE Taper Continuity Bets

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The Japanese Yen outperformed in overnight trade, rising as much as 0.7 percent on average against its leading counterparts, as a drop on Asian stock exchanges drove demand for the safety-linked currency. The MSCI Asia Pacific regional benchmark equity index fell 0.9 percent, recording its biggest drop in three weeks. The British Pound bore the brunt of the selloff, sliding as much as 0.5 percent on average against the majors.

Looking ahead, the spotlight is on December’s preliminary set of German CPI figures. The benchmark year-on-year inflation rate is expected to edge higher to 1.4 percent, marking a three-month high. While the result may offer a near-term boost to the Euro as a pickup in price growth works against bets on an expansion in ECB stimulus efforts, the single currency seems unlikely to remain well-supported.

Indeed, the disparity between the monetary policy needs of Germany and must of the remainder of the currency bloc are nothing new and strong performance in the region’s top economy will probably dictate the kind of easing to be undertaken by Mario Draghi and company rather than dismiss additional accommodation altogether. An augmented LTRO program with added conditionality or something akin to the BOE’s FLS scheme are some of the possible alternatives.

Later in the day, the spotlight shifts to the US Non-Manufacturing Composite gauge. Expectations suggest service-sector activity accelerated in December after hitting a five-month low in November. Such an outcome is likely to support speculation about continued “tapering” of the Federal Reserve’s QE asset purchases, boosting the US Dollar against most of the G10 FX space. Top European currencies – where monetary policy divergence with the Fed is especially pronounced – seem particularly vulnerable.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

22:30

AUD

AiG Performance of Service Index (DEC)

46.1

–

48.9

1:45

CNY

HSBC/Markit Services PMI (DEC)

50.9

–

52.5

5:00

JPY

Vehicle Sales (YoY) (DEC)

18.7%

–

13.3%

Euro Session:

GMT

CCY

EVENT

EXP/ACT

IMPACT