In response to the UK inflation numbers, the pound sterling fell to an intra-day low yesterday (briefly below 1.51), but since then it’s been recovering and it currently hovers around the 1.52 level.. I can certainly understand the dip, after all annual CPI only rising 0.5% versus 0.7% expected and 1% previously, it’s reasonable to reassess rate rise expectations. The rally afterwards is a bit harder to explain, I would like to think that the market views this disinflation as I do… a tax cut for consumers, but deflation is a compelling narrative that everyone wants to promote. So if it’s not the growth benefits of richer consumers boosting sterling what is it? Perhaps it’s as simple as the market was too short of sterling, and mark my words, this was certainly all about sterling, because even as GBP/USD has rallied, so too did EUR/GBP fall. This bounce in GBP/USD looks corrective and the 1.5235 – 60 zone might be the area where we reverse back into trend again. We’ll probably find out either way today.

As with the UK, so too France this morning, inflation numbers falling to the lowest levels since 2009. The pressure on Mr Draghi to deliver quantitative easing must be enormous. I can well understand from a government’s perspective why deflation should be feared, with their massive debts that much harder to pay off, so I fully expect this deflation narrative to persist in the coming months, even though we’ve known for some time that falling energy prices would be disinflationary.

On the other side of the pond, the small business optimism data was strongly positive, and even better still, there are signs that wage growth is set to pick up, with the compensation plans of small businesses showing a marked rise. This is great news for the US economy, you don’t pay top dollar, if you aren’t bullish about future prospects, and planning on hiring more people. But we must temper our optimism about US growth with news of the World Bank cutting its global growth forecast, they are concerned about other regions and the limitations of central banks at the zero bound. I’m a bit sceptical myself, I rather think we may end up underestimating global growth this year, but they’re the experts!

US equities posted lower lows yesterday, in fact it’s becoming noticeable over the last few days that buyers are overwhelmed by sellers only when US markets start trading. Whether US investors have a different view on the world to everyone else, or some as yet unknown reason, the pattern is intriguing. As we approach the year to date low for the S&P 500, it’s fair to say from a technical perspective, that we really need to hold above there, otherwise we could be set for deeper corrections…. we’re only 1% above said lows currently.

Copper prices collapsed yesterday, and I mean they really collapsed, falling over 10% at one point. There was a recovery of some sort into the close, but it looks like the metal is opening significantly lower than yesterdays close -not a good sign! It’s a strange world we live in.. if you accept that commodity prices have some predictive power about future growth prospects then we should all be very worried. You only have to look at oil, and now copper over the last few months. It’s not every day copper trades so violently. But I would argue that commodity prices have a much weaker predictive power than in the past. What with stockpiling, leverage, economic advancements, China.. commodities like copper are a good deal less macro, and far more idiosyncratic these days. However we can’t say there is no predictive capability anymore so we would do best by logging yesterday’s price action, who knows it might yet be a canary in mine. By the way, if you missed it yesterday, the UAE – an OPEC member – was unrepentant about the cartels decision to maintain production levels…. $30 oil doesn’t look so far-fetched anymore.

We have the Philly Fed manufacturing index to look forward to later. As well as some producer price indices as well. A fairly light day data wise, but we’ll keep an eye out for items that could affect currencies. It’s been a while since I’ve mentioned the Russian rouble specifically, because things have really calmed down over the last few weeks, but if anyone thought it was over… think again. Yesterday there were signs of some excitement again, with the currency weakening again. It’s nothing too dramatic yet, but given the moves in the commodities markets in recent weeks, we would be foolish to expect no reaction. Needless to say I’ll be keeping a closer eye on the Slavic currency again. This may also be the signal to start paying closer attention to emerging market currencies in general. Christmas was a quiet time for these less liquid currencies and they made some recoveries. With commodity prices collapsing there is no reason why these currencies shouldn’t come under pressure again.

Meanwhile the Japanese yen goes the other way, trading at 2 month highs at the moment. For me.. this move is very clearly corrective within a longer term bullish trend, USD/JPY could go lower still in the short term, so there will be opportunities to sell yen (buy USD/JPY) at better levels. As bearish as we sound about the euro it’s probably fair to say that we are more bearish about the Japanese yen in the long term! Horrifying thought…

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