National Bank of Kuwait: US dollar rules in uncertain world

Now that the quantitative easing has ended, the Federal Reserve has introduced the world into a new era of uncertainty and market participants are attempting to predict what the Fed will do in 2015, the National Bank of Kuwait (NBK) said in its economic report on Sunday.
For now, the US dollar continues to be the safest bet while commodities currencies continue their underperformance.
During its recent meetings, the FOMC (Federal Open Market Committee) discussed ways to normalize the stance of monetary policy and the Federal Reserve securities holdings, however, the discussions did not imply that normalization would necessarily begin soon.
However, the beginning of 2015 will be a major steppingstone in how the Fed is likely to attempt to drain liquidity from the financial system without raising interest rate.
In summary, global inflation remains subdued, and after a 13 percent increase, the DXY (USD Index) is likely to see a pause in consolidation as investors take profit from their long positions into yearend, wait for December to pass and January to bring some clarity to financial markets.
On the foreign exchange side, the US dollar kept its strength as speculation continued that interest rates in the US may rise sooner than expected in 2015.
Currencies volatility continue to be the theme with major moves taking place against the Japanese Yen reaching a high of 121.85 but closing the week at 119.00.
The Euro on the other side ended the week on a slightly stronger note after reaching a low of 1.2247 on Monday. In a similar fashion, after visiting a low of 1.5542 in the beginning of the week, the Sterling Pound strengthened by the end the week to reach the 1.5700 level.
In the commodities markets, precious metal prices recuperated some of their losses, with gold stabilizing above the 1,200 level while crude oil closing the week poorly at USD 59.
Retail sales excluding automobiles, gasoline, building materials and food services, increased 0.6 percent in November after rising 0.5 percent in October. November's increase exceeded analysts' expectations for a 0.4 percent gain.
It also suggested that consumer spending, was accelerating in the fourth quarter after slowing in the July-September period. Retail sales in summary were decent and import price were not quite as weak as expected coming at minus 2.3 percent y-o-y versus minus 2.5 percent.
Investors were not be shocked by retail sales strength as cyber sales were a record in December.
On another front, US mortgage applications to purchase new homes fell 22 percent in November from October, as first-time homebuyers struggled to obtain loans.
The latest data suggested "builders are having greater success with higher priced homes and difficulty at the entry level. New single-family home sales were running at an annual rate of 401,000 units in Nov down 13 percent from October's pace.
On an unadjusted basis, it was projected that 28,000 new homes were sold last month, down 22.2 percent from 36,000 in October.
On Europe, the NBK report noted that the European Central Bank (ECB) is again in a wait-and-see mode.
Up until now, the ECB was able to weaken the Euro through, mainly verbal intervention and negative interest rates. Having dropped almost 12 percent from May, the Euro has reached a low of 1.2247 last week.
As mentioned by Draghi on couple of occasions, the ECB wishes to grow their balance sheet towards the 2012 level, however according to Benoit Coeure, the governing council agreed unanimously to assess early in 2015 how and when to react to the downside risks of inflation.
Contrary to what analysts were predicting, the latest ECB meeting in December should not be seen as failure to act, but just playing out the political economy process to prove that all other venues have been exhausted before conducting a full-blown QE (quantitative easing) eventually in 2015.
To reiterate the ECB's resistance to any rise in real yields, ECB Peter Praet noted this week they may have cut rates in December if there was still room to move.
For now, it seems that the ECB is still working on stimulus tools and analyzing the effect of the drop in oil prices on the Euro-area inflation in the coming months.
In parallel, the market seems still skeptical over the ECB capacity for delivering the long awaited stimulus; however, there is a bigger probability that the ECB might announce the beginning of QE in the first quarter of 2015.
After a disappointing couple of weeks in Britain where economic data came lower than expected while the Pound declined to the 1.55 levels, the year-end could see a slightly more positive picture for the British Pound (GBP).
Moreover, assuming the ECB delivers the long awaited stimulus in the beginning of 2015, the Pound should benefit from portfolio inflows on the back of low European yields.
In parallel, monetary policy expectations have fallen back considerably after the BoE slashed its forecast for wage growth as well as inflation expectations.
The BoE (Bank of England) also stated that how fast wages picked up would be key to determining the timing and pace of interest rate rises.
Looking forward into the beginning of 2015, GBP movements are less likely to react as vigorously as in 2014. Currency changes will be mostly affected by economic outcomes, as the whole economy becomes more data dependent.
Attention remains to the country's domestic monetary policy, while investors eye the housing data, inflation, and wage growth.