EUR/usd
Last week the markets continued their way up. We expected this outcome not only because of the high demand for risk, which appeared thanks to the major CBs and their money emissions since the third quarter of the previous year. The move was also boosted by the preceding stagnation in the markets. The Forex volatility indicator was minimal in December and the stock market one, VIX, hit its 5yr lows. We've had bad experience with such drops of the implied volatility before – over the last 5 years such lulls have ended with a decline. Let's see if this time the lull will be followed by a decline again. Optimists believe that it won't due to the soft US monetary policy, which the Fed has stuck to for a few years. Over that time corporations have managed to store huge cash reserves, which may go for expansion of production, creation of new jobs etc., if corporations have confidence in the future. The latter was missing all through the second half of 2012 due to slackening in China's economic growth rate, recession in Europe and the impeding fiscal cliff in the USA. Now all these problems are almost gone (the unsettled question of the debt ceiling not counted), so it's quite normal that the stock indices should consolidate around their 5yr highs. Against this background the euro's performance looks rather modest. At the moment the pair is a bit below 1.34, i.e. at the same levels as 10 months ago. January is traditionally a very bullish month for eurusd, so we expect that by its end the pair will have reached 1.35 and, probably, 1.37 with the target for February at 1.40.
EUR/GBP
The Forex rally, which started earlier than in the stock exchanges, involves crosses for the most part. The yen-crosses are really interesting, but so does EURGBP. For the last six days it closed positive, besides each time a new daily high exceeded the previous one. The most interesting thing is that over the last two days the move was gathering pace and today the pair opened with a gap and is now trading already at 0.8290. This is the highest level since April 2012. But apparently it's not the end of the big upward trend, which set in at the end of July.
EUR/CHF
Further about the unusual activity in crosses. EURCHF is rallying. For the first time since December 2011 it's trading above 1.22. Over the last three trading days the pair has made a trip from 1.2085 to 1.2232. The SNB may finally heave a sigh of relief, since it no longer has to flood the markets with francs to keep the currency from appreciating. The bad thing is that over that time the economy suffered a great loss of jobs, yet it is sure to lose more due to the poor state of affairs in Germany. Let's add here the continuing deflation in the country, about which we learnt at the end of the last week (the annual CPI remains negative, -0.4% y/y). Switzerland gets some benefit from introduction of negative interest rates on some deposit types by the country's major banks, but still the current rate of the franc is too high to make any significant changes.
USD/CAD
Against the background of depreciation of the US dollar and across-the-board demand for risky assets the weakness of the Canadian Loonie is especially striking. It is much behind the handicap of the leading currencies. usdcad only managed to hit the lows of last December. It's because of poor economic indicators and unimpressive trade balance of the country.
