EUR/USD The Euro initially pushed higher in European trading as risk appetite deteriorated and was broadly resilient during the day as Chinese trends continued to dominate markets. Euro-zone unemployment data was better than expected with a decline to 10.5% for December from a revised 10.6% previously while there was a second successive decline in retail sales. Firmer German factory orders data was offset by a lacklustre retail sales print. US jobless claims fell to 277,000 in the latest week from 287,000 previously which had little overall impact with markets continuing to focus on risk conditions. Dallas Fed President Lacker stated that underlying inflation would gradually move towards the 2% level once the impact of lower energy prices fades. Chicago head Evans, who is a dovish FOMC member, stated that 1% rates at the end of 2016 would be consistent with the inflation mandate and that he was nervous over the strong dollar impact. Comments from policymakers will continue to be monitored closely in the short term. There was further volatile trading during the New York session and, after initially edging lower, the Euro pushed significantly higher to a peak around 1.0940 as risk appetite deteriorated once again. There was an element of caution ahead of Friday’s US employment data given the potential for short-term volatility, although any figure relatively close to expectations of 200,000 should have only a measured policy impact and limited longer-term implications. The Euro dipped back towards 1.0850 on Friday as calmer risk conditions encouraged renewed selling.




JPY After finding some support below 117.50, there was a slightly improved attitude towards risk appetite during the day, although market conditions were very erratic. There were rumours that China could abandon the market breakers after they were triggered twice during the first week which contributed to choppy trading conditions and after confirmation that the circuit breakers would be scrapped, there was a rise in Chinese futures prices. There was still underlying caution and the dollar struggled to regain the 118.00 level with further pressure on the Saudi riyal. Chinese equity markets were slightly stronger on Friday in volatile trading and the PBOC fixed the yuan stronger which eased immediate market fears, although underlying confidence in policymakers was very fragile. Domestically, a weaker than expected release for average earnings renewed demand concerns and the yen weakened towards 118.50 against the dollar.




GBP
Sterling was subjected to further strong selling in Europe on Thursday with the Euro breaking strongly higher to a peak near 0.7470, the strongest Euro level since mid-October. The UK currency also retreated to lows below 1.4550 against the dollar and the weakest reading since mid-2010. Sterling tended to lose ground when risk appetite deteriorated, especially with oil prices falling further, and underlying sentiment remained weaker. Although there was a 1.7% gain in the Halifax house-price index with a 9.5% annual gain as supply shortages continued, expectations of a GDP-growth slowdown stayed intact. Political considerations remained an important background focus with a potential EU in/out referendum this year. Chancellor Osborne stated that it would be inappropriate to put pressure on the Bank of England to raise interest rates. The UK currency gained some respite on Friday with a move back above 1.4600 as risk conditions improved. Domestically, the latest trade data could have a significant impact on underlying sentiment given the focus on UK fundamentals.




CHF
The Euro was was able to maintain a positive tone against the franc on Thursday with a peak around 1.0880 while the dollar was unable to make much headway above parity. There was further speculation that the National Bank had intervened to push the currency weaker. Swiss National Bank currency reserves fell slightly in December to just below CHF560bn which did not suggest heavy intervention, although there will be valuation effects which will mask bank actions. The franc was broadly resilient when risk conditions improved as traditional correlations tended to break down.





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