Daily Agenda: Surprises Abound in Currency Markets

As the work week winds down, the upcoming European Central Bank announcement steps into the spotlight. The ruling yesterday by the European Union Court of Justice to give the greenlight to the ECB’s Outright Monetary Transactions program helps to clear the way for bank president Mario Draghi to initiate a purchase facility for the sovereign debt of member states. With a slew of deflationary data points indicating the EU has failed to see increased external demand driven by a weaker euro and low oil prices, regional hopes are now pinned on monetary policy. For investors, the path is clear. Yields in European bond markets will remain tight for the foreseeable future. The debate remains as to whether the European economy can be jump-started through policy measures in the absence of structural reforms.

Switzerland drops currency cap. In a surprise to currency markets, the Swiss National Bank withdrew a exchange rate limit of 1.2 Swiss franc to the euro and also reduced interest rates on some deposits. The abrupt decision one week in advance of the ECB’s next meeting, is interpreted by analysts as a capitalization in the face of presumed euro zone quantitative easing that will make defending a weaker franc unviable.

German GDP numbers as expected. Initial release fourth-quarter 2014 gross domestic product for Germany matched consensus forecasts at 1.5 percent, the fastest pace in three years. This data confirms stable internal demand driven in part by labor reforms and other structural shifts that has allowed the EU’s largest economy to diverge from EU members mired in stagnation.

China registers record oil imports. Data released by China’s General Administration of Customs yesterday indicated inflows of 7.19 million barrels of oil per day in December. Miswin Mahesh, an oil market analyst at Barclays in London, warned in a report issued yesterday against interpreting the figures as an improvement in Chinese demand, however, citing an increase in exports of refined products and increased storage capacity that allows refineries to stockpile larger amounts at the current depressed price levels.

Casino operator Caesars goes bankrupt. Caesars Entertainment Corp. filed for Chapter 11 bankruptcy protection in Chicago in the latest development in legal wrangling between private equity firms Apollo Global Management and TPG Capital Management, which purchased the casino operator in a leveraged buyout in 2008, and with bondholders that accuse the two firms of self dealing. This reorganization of the operating unit, with over $7 billion in liabilities in excess of assets, shields the casino’s parent company from negotiating with creditors.

New Russian currency leadership announced. The Central Bank of Russia announced yesterday that Dmitry Tulin will replace Ksenia Yudaeva as first deputy governor of the central bank. The new appointment comes as the administration of Russian President Vladimir Putin increases pressure on policymakers to defend the ruble. Yudaeva oversaw more that $88 billion in market interventions since ascending to the monetary policy post in 2013, largely in vain, as the impact of declining oil and Western sanctions drove Russia’s currency to record low exchange rates.

India cuts benchmark rates. Raghuram Rajan, governor of the Reserve Bank of India, in a surprise move today announced a cut in the bank’s benchmark rate from 8 percent to 7.75 percent. With headline consumer inflation reaching 5 percent on weaker global demand and lower oil, policymakers in the nation have an increasingly free hand to adopt accommodative policy measures in the face of slack demand elsewhere in the region. Last week India Ratings and Research released projections for 2015 GDP in India will reach 6.5 percent, following growth of 5.6 percent in 2014.

U.S. economic data on deck. After last week’s unexpectedly strong employment report, today’s weekly initial jobless claims figures are expected to remain roughly in line with those of last week, as holiday distortions subside. Meanwhile, headline producer price index data for December is forecast to contract for the month, as soft energy prices continue to weigh on the cost of goods at the factory gate.

Fourth-quarter earnings season continues. Among the companies reporting after the close of equity trading in New York are Schlumberger and Intel. In an announcement this morning, Citigroup disappointed investors with a reported 6 cents per share and $17.8 billion in revenues for fourth-quarter 2014, versus analyst estimates of 9 cents per share on revenues of $18.5 billion.