The USD was able to hold gains in the Asian session. The EURUSD started the session at 1.4535, as growing concerns over European sovereign risk and Austrian banking sector, combined with the hawkish shift in FOMC expectations, after strong US data (including NFP, Retail Sales, PPI and Industrial Production). In Australia, the Q3 GDP fell well short of expectations and only managed to expand by +0.2% q/q vs. 0.4% exp, In addition, RBA Assistant Governor Battellino further cemented the central bank's pause, stating overall stance of monetary policy is now back in the normal range, though in the expansionary segment of that range, since interest rates such as business and housing have outpaced the cash rate, making 3.75% today equivalent to 4.75% pre-crisis. The AUD continued to come under selling pressure, falling to 0.8960 against the USD.
At their last meeting, the Norges Bank became the second major central bank (after the RBA) to begin monetary tightening after the onset of the financial crisis, raising rates by 25bps to 1.50%. At this latest meeting, the consensus is looking for the deposit rate to be unchanged, but we would side with the few outside bets looking for a further increase of 25bps to 1.75%. The reason for this is that economic data since the last meeting has for the most part been outstandingly good; Q3 GDP was 0.9% QoQ (0.8% expected), November CPI ticked up to 1.5% YoY (from 0.6% prior), latest Retail Sales were a breath-taking 2.1% MoM (0.7% expected), Unemployment remains at an enviably low 2.6%, and Consumer Confidence has surged higher in Q4. The last meeting statement revealed that “The Executive Board’s strategy is that the key policy rate should be in the interval 1¼ - 2¼ per cent in the period to the publication of the next Monetary Policy Report on 24 March 2010, unless the Norwegian economy is exposed to new major shocks.”; clearly indicating that there is plenty of scope for further tightening within their projected band.
Yet again, it is universally predicted that the FOMC will keep the Fed Funds rate at its “exceptionally low” 0.25%, and preserve the familiar structure of the accompanying statement from previous meetings. In spite of the astounding non-farm payroll figures earlier this month, and more recently the big surge in US Retail Sales; it is unlikely the FOMC will be willing to change their tack on the projected path of US rates based solely on these early indications. For now, the weakness of the USD is playing an important role in aiding the progress of the US economic recovery, and we believe that the statement will echo Bernanke’s recent remarks that the low-for-long stance remains entrenched.