The Euro-zone will continue to be an important underlying focus with markets uneasy that reform momentum could fade as the immediate pressure for action fades , especially if there is a further prolonged delay in Spain requesting an aid package. Political divisions are also liable to intensify over the next few weeks. There will also be further concerns surrounding the global economy with Asian economies of particular interest given hopes that there could be some recovery in demand.
Key events for the forthcoming week | Date | Time (GMT) | Data release/event | | Tuesday October 23rd | 13.00 | Bank of Canada interest rate decision | | Wednesday October 24th | 07.30 | German PMI index (manufacturing) | | Thursday October 25th | 08.30 | UK GDP (Q3) prelim | | Friday October 26th | 12.30 | US GDP (Q3) advance |
Dollar:
The US economic releases have maintained a generally mixed tone with slightly more optimistic consumer spending data offset by underlying reservations surrounding the outlook and mixed business surveys. The Federal Reserve will remain committed to a highly-expansionary monetary policy even if the economy strengthens which will certainly limit dollar support. Provided unease surrounding, the fiscal outlook can be contained, there should still be net support from expectations that the economy will out-perform Europe. Any fresh deterioration in risk appetite would also provide important support for the US dollar with the US Treasury market still seen as attractive.
The dollar dipped sharply to one-month lows during the first half of the week, but did find support at lower levels and was then able to regain some ground.
There was a stronger than expected 1.1% increase in retail sales for September with underlying sales also rising 1.1% for the month. There was a more positive outlook towards consumer spending. The latest housing starts data was stronger than expected with an increase to an annual rate of 0.87mn for September as permits also registered a monthly increase of over 10% with both series at the strongest level since 2008.
The latest US jobless claims data recorded a sharp increase to 388,000 in the latest week from a revised 342,000 previously. The reinforced expectations that the previous data had been distorted by incomplete data from one of the states and the data overall did not suggest any underlying improvement in the labour market.
The headline Philadelphia Fed release was stronger than expected at 5.7 from -1.9 previously which was the strongest reading since April. The underlying components were, however, significantly weaker with a notable decline in the employment index.
There was disappointment surrounding the latest Google results which had a negative impact on risk conditions. Markets also expect the Fed to maintain a very accommodative monetary policy even when the US economy strengthens, a point emphasised by Fed Governor Dudley in remarks over the week.
| Euro | Political leaders and the ECB have managed to calm markets with a sharp decline in peripheral bond yields which will help to underpin near-term Euro sentiment with expectations that Spain will move to request a sovereign bailout. There are, however, still extremely serious economic and political difficulties within the Euro area and very important divisions between the core and peripheral countries. In this environment, there is still an important risk that confidence will deteriorate very rapidly again and put the Euro under renewed pressure, especially as the Greek situation remains unresolved.
The Euro gained support from a greater tone of optimism surrounding Spain and Greece, especially after the Moody’s announcement before fading later in the week with no major challenge on the 1.32 region.
The German ZEW survey was slightly stronger than expected at -11.5 for October from -18.2 the previous, but participants were still generally very cautious over the outlook and, significantly, stated that the ECB plans for bond purchases had not had a significant impact in boosting confidence.
Spain continued to have an important impact with continuing speculation over both the format and timing of any aid request. There had been reports that Spain might seek a precautionary credit line and German Lawmakers appeared to say that they would not have any objection to such a credit line. Officials looked to backtrack on these comments, but confidence remained higher. Moody’s maintained its investment grade credit rating for Spain, although there was still a negative outlook.
The latest Spanish bond auction registered a decline in yields, which helped to maintain the more positive tone towards Spain and the Euro as a whole. There were still very important concerns surrounding the Spanish outlook as the ratio of non-performing loans increased to a record high of 10.5% in the latest month. With house prices continuing to decline in the third quarter, there were continuing fears of a vicious circle within Spain and severe medium-term damage.
EU leaders continued to play down expectations of any major announcements or progress at the Summit which started on Thursday with markets attempting to focus on proposals for banking union. There was agreement on the framework to put in place a single supervisor for the banking sector, but there were no further announcements on the timetable which maintained expectations that the 2013 start would not be reached. There were further concerns surrounding the Greek outlook as talks with the troika failed to reach agreement.
Yen:
Overall confidence in the economy will remain very fragile, especially with important concerns surrounding the global growth outlook which will inevitably have important implications for Japanese exporters. There will be pressure for the Bank of Japan to announce additional stimulus measures and there will also be speculation that any new government will also announce additional measures to underpin growth and weaken the Japanese currency. If risk appetite deteriorates, the yen will still gain some degree of defensive support.
The dollar pushed to highs in the 79.50 area against the yen on expectations that there would be further Bank of Japan monetary-policy action. Softbank confirmed that it was taking a majority stake in Sprint Nextel for around US$20bn which had a negative impact on the Japanese currency on expectations of capital outflows.
There was also evidence of buying on technical grounds as speculative players looked to break resistance levels and there was also dollar support from the stronger than expected US retail sales report. The premium on US Treasuries over Japanese bonds widened to a two-month high which underpin the US currency.
There was speculation that the Bank of Japan would sanction additional monetary easing at this month’s meeting. There was also some speculation that any new government would look to introduce fresh measures designed to combat yen strength. |
| Sterling | There will be major uncertainties surrounding the economic outlook in the short-term, especially as generally weak growth data has been offset by stronger than expected employment releases. Monetary policy uncertainty will also remain a very important factor with a perception that there are greater reservations within the Bank of England over any further quantitative easing. Risk appetite conditions will be important and Sterling will be more resilient when sentiment improves. From a longer-term perspective, there will still be speculation that Sterling weakness will be a key element required to support the economy.
Sterling was unable to break above 1.62 area against the dollar during the week and retreated sharply to test support just above 1.60 as it faltered against the Euro.
The latest consumer prices data was broadly in line with expectations with the annual inflation rate declining to 2.2% from 2.5%, the lowest rate since late 2009. The data reinforced expectations that the Bank of England would have greater flexibility to boost quantitative easing further in order to combat continuing economic weakness.
The latest labour-market data was stronger than expected with a further decline in the claimant count of 4,000 for September following a revised 14,200 decline the previous month and unemployment fell to 7.9% from 8.1%. The robust data boosted confidence in the economy to some extent, although it did serve to increase perplexity given the reported combination of weak growth and a solid labour market.
There were no major surprises in the Bank of England minutes with unanimous votes on both interest rates and quantitative easing in October. There was, however, evidence of increased underlying divisions which will have an important impact at November’s meeting. Despite concerns surrounding the growth outlook, there were also increased concerns surrounding inflation and greater doubts over the effectiveness of quantitative easing. In this environment, there was some downgrading of further quantitative easing expectations which underpinned Sterling.
The latest retail sales data was stronger than expected with a monthly increase of 0.6% for September following a revised 0.1% decline the previous month with a boost from an increase in clothing sales.
Swiss franc:
There has been some underlying reduction in defensive flows into the Swiss currency as immediate fears surrounding the Euro-zone have subsided. There will still be fears surrounding the underlying Euro outlook which will maintain the potential for defensive inflows, especially if Spain continues to stall on an aid request. Yields have also remained negative at Swiss bill auctions which suggests that there is still significant demand for the Swiss currency.
The dollar was unable to make any headway against the franc and dipped to lows just below 0.9220 before stabilising. The Euro was able to make only a small-scale advance against the Swiss currency with tough resistance above 1.21.
The Swiss ZEW index improved slightly to -28.9 for October from -34.9 the previous month. There were still negative interest rates at the latest bill auction which suggested there was still an important element of defensive franc support even though immediate fears surrounding the Euro-zone outlook have eased slightly. |
| Australian dollar | The Australian dollar found support on dips to the 1.02 area against the US currency during the week before recovering back to the 1.04 area as risk conditions improved. Global trends tended to dominate and there was a slightly more optimistic tone provided some degree of support for the local currency.
The Reserve Bank minutes stated that it would consider an interest rate cut in the short-term, but the overall domestic influences were limited.
Although there has been a slightly more optimistic tone towards the global economy, the Australian dollar will find it very hard to make much headway
Canadian dollar:
The Canadian dollar was trapped in relatively narrow ranges during the week with solid US buying support on dips to the 0.9750 region while there was resistance on an approach to the 0.99 area.
Bank of Canada Carney was less confident surrounding the growth outlook and suggested that there would be a greater reluctance to tighten monetary policy and this did have a negative impact on the Canadian dollar.
Despite expected merger-related inflows, it will remain difficult for the Canadian dollar to make significant gains given persistent global growth doubts.
Indian rupee:
The rupee was unable to make significant headway during the week even when where were wider US dollar losses and the currency and it retreated to one-month lows. There was persistent US currency demand from oil importers. There was also evidence of a reduction in short dollar positions following the surprise gains.
There was some speculation that the government was also buying dollars in relation to defence contract payments. The local equity market failed to make significant headway with uncertainty surrounding the October 30 monetary policy meeting.
Underlying US dollar vulnerability will continue to offer near-term rupee support, butt he currency is unlikely to make much headway in the short-term.
| Hong Kong dollar | The Hong Kong dollar found support on any significant dip and moved to test the strongest level of the band at the 7.75 level for the first time in 2012.
Regional influences were more important as the Chinese yuan pushed to fresh 19-year highs which increased speculation over a medium-term move to adjust the Hong Kong currency regime.
If the yuan continues to strengthen, medium-term speculation surrounding the Hong Kong peg is also liable to increase with the peg limit under increasing pressure.
Chinese yuan:
The yuan maintained a strong tone over the week and pushed to fresh 19-year highs on the spot market. There was further evidence of aggressive dollar selling by commercial banks which was important in supporting the local currency.
The third-quarter GDP data was in line with expectations at 7.4% with slightly stronger than expected data for industrial production and the trade account which sparked some hopes that a downturn in the economy was easing.
There was also further speculation that the Chinese administration was happy to push for a stronger yuan ahead of the US Presidential election on an assumption that they would prefer a Democrat Administration.
Political considerations may favour near-term yuan strength, but it will be difficult to sustain any further significant gains given the domestic economic backdrop. |
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