The Euro-zone
will be an important short-term focus without any deal reached on
Greece. The most likely outcome is that will be a compromise deal, but
this will not solve underlying issues as the economy continues to
contract. US fiscal negotiations will also be watched very closely with
any deal providing short-term relief to risk appetite. Underlying
growth concerns are still likely to be important in curbing risk
conditions.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Monday November 26th |
| Eurogroup meeting |
| Tuesday November 27th | 09.30 | UK GDP (Q3 revised) |
| Thursday November 27th | 15.00 | US consumer confidence |
Dollar:
There will be further uncertainty surrounding the US economic
outlook with the data vulnerable to further distortions, but there will
be some unease over evidence of a slowdown. The Federal Reserve has
indicated that it will maintain a very loose monetary policy over the
next few months and there will certainly be some pressure within the Fed
for even more bond purchases at the December meeting. Fiscal policy
will also be watched very closely and any budget agreement would
underpin US growth hopes, but would also dampen defensive dollar
demand. Underlying global risk trends should still prove to be broadly
supportive for the US currency, especially if Euro-zone fears intensify
again.
The dollar proved broadly resilient on a
trade-weighted index during the week, but it did lose ground against
European currencies with the Euro pushing to three-week highs near 1.29.
The latest US housing starts
data was stronger than expected with an increase to a fresh four-year
high of 894,000 while permits were broadly in line with expectations.
Regional Fed President Lacker was again generally critical of the US
policy stance with a warning against further quantitative easing which
did provide some initial dollar support, although Lacker is certainly a
minority opinion.
Fed Chairman Bernanke warned over the
need to avoid a fiscal confrontation and increased pressure on Congress.
There were no indications that there would be any fresh monetary
stimulus at this stage even though the pace of recovery was still
described as weak. There were still expectations that there could be
additional policy measures in December with Operation Twist due to
expire, especially with Bernanke stating that it would do whatever is
necessary to support the economy and curb unemployment.
There was a decline in US jobless
claims to 410,000 in the latest week from 451,000 previously as the
impact of Hurricane Sandy started to fade. There was an improvement in
the PMI manufacturing index to 52.4 from 51.0 previously.
Market
activity faded during the New York session ahead of Thursday’s
Thanksgiving Holiday with the Euro holding above the 1.28 level.
Regional Fed President Williams continued to push for further quantitative easing which helped undermine the dollar
| Euro |
Despite
continuing tensions with the IMF, there is a strong probability that
there will be some form of agreement to provide the next loan tranche to
Greece which will provide initial relief. There will, however, be
major concerns surrounding the underlying outlook as any fudged deal is
unlikely to convince markets that the overall debt burden and overall
issues are being tackled. A lack of growth will remain an extremely
important issue both for the peripheral and core economies. There will
also be pressure for the ECB to adopt a more expansionary policy to
support the growth outlook with the Euro still vulnerable.
the Euro dipped
sharply following Moody’s announcement of a downgrade to the French
credit rating to AA1 from AAA, but overall selling pressure was
contained and the Euro also recovered ground after failure to reach
agreement on Greece.
Following a 12-hour meeting, the Eurogroup failed
to reach agreement over the latest loan tranche to Greece. The IMF has
insisted that changes to the austerity programme need to be made in
order to reach a projected debt/GDP target of 120% by 2020. On current
projections, this ratio is likely to be around 145% according to
internal documents with the risk that it will be substantially higher.
This increases pressure for official debt-write-downs as the only
realistic method to ease the debt burden. Germany and other ‘hard’
Euro-zone members are very strongly opposed to any official haircut and
no deal was reached. The Euro weakened sharply to lows below 1.2750
against the dollar and a further Eurogroup meeting will be held on
Monday in an attempt to bridge the divide.
The latest Euro-zone PMI manufacturing data
was marginally better than expected with a recovery to 46.2 from 45.4
previously. In contrast, there was a weaker than expected reading for
the services sector with the lowest reading since the middle of 2009 as
output, orders and employment all fell sharply. There will also be
concerns that the rate of deterioration in peripheral economies
accelerated again during the month. There was also a further drop in
consumer confidence to the weakest reading for three years which will
maintain fears surrounding the outlook. The German IFO index increased
for the first time in 7 months which provided some relief.
There was a satisfactory Spanish bond
auction as Spain looked to start the 2013 programme and benchmark
yields dropped from levels seen earlier in the week. There were further
expectations that the Eurogroup would be able to secure a Greek deal
next week with suggestions that the IMF would allow an increase in the
projected 2020 debt/GDP ratio to 124% of GDP from 120%.
There
were still concerns surrounding remarks from ECB member Asmussen who
maintained pressure on the German government by stating that countries
who had a red line on debt write-downs needed to compromise elsewhere.
Yen:
There will be further concerns surrounding the Japanese economy
with particular fears surrounding exports following another monthly
trade deficit. The political situation will be very important with a
general election scheduled for the December 16th. The LDP, which is
ahead in opinion polls, has pledged to push for a much more aggressive
monetary policy and will also push to curtail Bank of Japan
independence. Both these factors would tend to undermine the yen and
underlying sentiment remains extremely weak. The yen could still gain
significant support if risk appetite deteriorates.
The dollar remained
under heavy pressure during the week and retreated to 7-month lows
beyond 82.75. The Euro also pushed to a six-month high against the
Japanese currency with a peak above 106.50.
The latest Japanese trade
data was weaker than expected with a headline JPY549bn deficit for
October, the worst outcome for this month for 30 years as exports
declined by 6.5% over the year. The data reinforced negative sentiment
towards the Japanese economy and yen.
Underlying sentiment
remained very weak on expectations of a major shift in economic
policies. Parliament was dissolved with elections scheduled for December
16th and there were comments from LDP leader Abe that a new government
would push for aggressive monetary policies and a weaker yen. There
were further expectations that an LDP government, if elected next month,
would push for monetary easing by the Bank of Japan and would look to
curb the bank’s powers in order to secure higher nominal GDP growth and a
higher inflation rate.
|
| Sterling |
There will be further doubts surrounding the UK economic outlook
with speculation that the economy will contract again in the fourth
quarter which would increase fears that the economy will enter recession
again. The Bank of England certainly remains very cautious over further
quantitative easing, but will consider further action if the economy
deteriorates again. There will be further concerns surrounding the
fiscal outlook and fears that any further deterioration will prompt a
credit-rating downgrade which would increase the threat of capital
outflows. Sterling overall will struggle to secure gains.
Sterling proved resilient against the dollar with support below 1.59 while the UK currency weakened against the Euro.
The Bank of England
minutes from November’s meeting recorded a 9-0 vote for unchanged
interest rates and there were comments suggesting that a cut in rates
was very unlikely over the next few months. There was an 8-1 vote for
resisting any further quantitative easing with Miles voting for a
further GBP25bn in bond purchases. The bank’s assessment suggested that
they are expecting a GDP contraction for the fourth quarter with only a
very weak expansion during 2013.
Unease surrounding growth trends
was also increased by the latest government borrowing data. There was a
higher than expected shortfall in October with tax receipts declining.
For the first seven months of the fiscal year, there was an underlying
increase in the deficit to GBP73.3bn from GBP68bn last year which
increased speculation over a credit-rating cut.
The latest CBI industrial survey
remained weak with a reading of -21 for November from -23 the previous
month with a deterioration in output expectations to the lowest level of
the year. This weakness will maintain concerns surrounding the economic
outlook with particular doubts surrounding exports given Euro-zone
vulnerability.
Swiss franc:
There
has been some underlying reduction in defensive flows into the Swiss
currency, but there will be the risk of fresh inflows if Euro-zone
tensions intensify again. The National Bank will remain strongly
committed to maintaining the 1.20 minimum Euro level in the short-term,
especially with an annual decline in exports according to the latest
data. Overall, the bank should be able to prevent franc gains for now
even though longer-term doubts surrounding the peg’s sustainability will
persist.
The dollar was on the defensive against the franc during the week and retreated to lows below 0.9350. The Euro was unable to make any impression on the Swiss currency and generally traded below 1.2050.
The latest Swiss trade data recorded an annual decline in exports with particular concerns surrounding the machinery sector
There was a further round of rhetoric from National Bank officials stating
that the Euro minimum level was an essential policy tool. Weakness in
Euro-zone economies will have an important impact in undermining exports
and this will make it even more of a priority to protect
competitiveness and resist franc appreciation.
|
| Australian dollar |
The Australian dollar
found support in the 1.03 area against the US dollar during the week
and rallied to the 1.04 area as underlying ranges were slightly narrower
than previously.
The Monetary policy minutes were in line with
expectations with the bank suggesting that rates could be cut again.
There was evidence that the Reserve Bank was looking to hoard foreign
currencies and also curb Australian dollar appreciation.
The Australian currency will
find it very difficult to make significant headway, especially with
speculation that the Reserve Bank will covertly curb currency gains.
Canadian dollar:
The
Canadian dollar found support close to 1.0050 against the US currency
during the week and strengthened to the 0.9950 area before consolidating
just stronger than parity. There was fluctuations in commodity prices,
but there was no significant net support for the Canadian currency.
The retail sales data was weaker than expected as was the wholesales data which maintained some concerns surrounding the economic outlook.
The Canadian dollar
is likely to weaken gradually against the US dollar, especially with
growing unease surrounding competitiveness in the economy.
Indian rupee:
The rupee remained generally on the defensive during the week and retreated to 10-week lows around 55.35 against the US currency before stabilising.
There was persistent dollar demand
from oil importers which tended to keep the rupee under pressure. There
were also further concerns surrounding the growth outlook and
uncertainty whether reform policies would be implemented.
With
continuing uncertainties over domestic economic policies and regional
growth concerns, the Indian rupee is unlikely to make much short-term
headway
|
| Hong Kong dollar |
The Hog Kong dollar
found support beyond 7.7520 against the US currency during the week and
pushed back to test the 7.75 band limit after generally dovish remarks
from Fed Chairman Bernanke..
HKMA officials continued to rejected
calls for a review of the currency peg, but there was still inevitably
speculation over a medium-term change, especially with fears that
current policies will intensify inflation concerns.
Medium-term
speculation surrounding the Hong Kong peg and a potentially radical
change in policies will continue, especially with increased inflation
fears.
Chinese yuan:
The yuan maintained a strong tone during the week and was generally stronger than the 6.23 level against the US currency. The PBOC fixed
the currency beyond the 6.30 level even though it resisted currency
gains with the currency frequently testing the upper band limit. There
was further evidence of aggressive dollar selling by corporates which
underpinned the yuan
There was a mood of greater optimism surrounding the economy as the flash HSBC PMI index rose to above the 50.0 level for the first time in over 12 months.
There
will be a slightly more optimistic near-term tone surrounding the
economy which will help underpin the yuan, but gains are likely to be
very limited.
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