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The
Euro-zone will continue to be an important underlying focus as
uncertainty surrounding the Spanish and Greek situation continues. Spain
will continue to be under intense pressure to make an bailout request
which would also facilitate the ECB bond buying programme. There will,
however, be the threat of increasing tensions, especially with
underlying tensions increasing. Growing fears over the implications of
continuing recession and global growth fears will remain an important
focus.
Key events for the forthcoming week
Date
| Time (GMT)
| Data release/event
|
Monday October 15th
| 12.30
| US retail sales
|
Tuesday October 16th
| 09.00
| Germany ZEW survey
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Wednesday October 17th
| 08.30
| Bank of England MPC minutes
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Thursday October 18th
| 08.30
| UK retail sales
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Dollar:
The US economic
releases have maintained a generally mixed tone, but with a slightly
more positive tone surrounding spending and employment. The Federal
Reserve has clearly indicated that it will maintain an aggressive
monetary policy to cut unemployment and the dollar will, therefore, find
it difficult to gain strong support, but there will be expectations
that the US economy will out-perform the Euro-zone in the short-term at
least which will curb selling. Presidential polls will be watched
closely, although the overall impact is likely to be limited. The US currency can
still gain significant support from unease surrounding the global
growth outlook, especially if Euro-zone fears intensify once again.
The dollar was
able to resist further selling pressure during the week, but found it
difficult to make much headway and retreated to near 1.30 against the
Euro.
The headline US employment report was close to
expectations at 114,000, although there were upward revisions to the
previous two month’s data which provided some support. The principal
talking point was the decline in unemployment to 7.8% from 8.1%
previously, contrary to expectations for a small increase and this was
the lowest rate since January 2009. The data boosted confidence
surrounding the economy to some extent and there was also some political
controversy that the data might have been manipulated. There was also a
stronger than expected release for consumer credit which underpinned
the spending outlook.
There were further concerns surrounding the
global growth outlook following a downgrading of forecasts from the
World Bank. The IMF also took a generally downbeat attitude towards
growth in its latest report with a warning that the risks of a fresh
downturn were very high. There were also concerns over the forthcoming
US earnings season with expectations of a weaker results contributing to
a generally negative attitude towards risk.
The US trade
deficit widened to US$44.2bn for August from a revised US$42.5bn
previously with a 1% decline in exports maintaining fears surrounding
the global growth outlook. The jobless claims data received greater
attention with a sharper than expected decline to a four-year low of
339,000 in the latest week from 369,000 previously, although there were
reports that one state was missing key elements of its data which may
have pushed the total artificially lower.
| Euro |
|
There
will be still be expectations of a near-term Spanish request for a
sovereign support package. There will also be fears that Spain has
wasted its best chance by delaying and that it will be much more
difficult to secure a satisfactory arrangement if market pressures have
already increased. There will be concerns that the ECB will be blocked
in its bond-buying plans. The key issue within the Euro-zone
will be continuing recession which will have a major negative impact on
economic and political conditions within Spain and the other peripheral
economies. In this context, market fears are liable to increase again.
The Euro retreated
from peaks seen following the US employment report, but proved broadly
resilient with caution over aggressive selling. The strong IMF warning
over the Euro-zone crisis had a significant impact in curbing underlying
Euro demand with further uncertainty the dominant focus.
The
German Finance Ministry continued to state that there was no need for a
Spanish bailout request, a line mirrored by other Finance Ministers as
Spain effectively remained in limbo. Standard & Poor’s downgrading
Spain’s credit rating by two notches to BBB- which is the lowest
investment grade.
ECB president Draghi stated that Greece
had made some progress, but that there was much more work required.
There was also a general tone of disappointment surrounding the
Eurogroup meeting with no significant progress on Greece or Spain which
also tended to undermine confidence in the Euro. There were also
important tensions surrounding German Chancellor Merkel’s visit to
Greece with no substantive policy measures under discussion.
There
were further concerns that Spain would not look to make an early aid
request, a point amplified by ECB officials during the day and there was
speculation that the bank might not launch its bond-buying programme
until next year. Although a near-term Spanish request would tend to be
seen as positive for the Euro, there were concerns that any prolonged
delay would quickly betaken as a negative factor with Spain seen as
having missed its chance. There was also further uncertainty surrounding
the Greek situation following German Chancellor Merkel’s visit.
Although
sentiment towards Spain was damaged by the sovereign-rating downgrade
from Standard & Poor’s, there was also speculation that the ratings
action would increase pressure on the Spanish government and make it
more likely that they would make an early request for aid. In this
context, there was a further reluctance to maintain aggressive Euro
short positions. There was caution ahead of next week’s EU Summit and a
pending Spain ratings announcement from Moody’s.
Yen:
Overall confidence in the economy will
remain very fragile, especially with renewed concerns surrounding the
export outlook. There will be further pressure on the Bank of Japan to
boost quantitative easing and there will also be demands for the yen to
be weakened in order to underpin export competitiveness. The yen can
still prove to be broadly resilient, especially given a lack of
confidence in the global growth conditions.
Japanese Prime Minister Noda stated
that the government was prepared to take action and act against
disorderly yen gains, but there was only a short-term market impact.
There was caution ahead of the G7 meetings, although with little
expectation that definitive steps would be taken on currencies. The
dollar was unable to break above 79 while there was support on dips to
below the 78 level.
The latest machinery orders data was weaker than expected with a 3.3% monthly decline and the latest Bank of Japan
minutes were generally downbeat. There will be some surprise that the
central bank did not take further action at the latest meeting given the
downbeat minutes.
There was also a comments from the Economy
Minister that Japan might decide to intervene to weaken the yen even
without US backing which increased concerns over buying the yen
aggressively.
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| Sterling |
|
Although
there will be expectations of an improved third-quarter economic
performance, underlying confidence will remain extremely fragile,
especially with concerns surrounding the export outlook after weaker
than expected trade data. The government remains committed to a
tightening of fiscal policy and monetary conditions will need to be
extremely loose which will trigger underlying selling pressure on
Sterling. There will be the potential for increased volatility as
safe-haven Sterling demand fluctuates.
Sterling dipped to a
two-month low on a trade-weighted index before finding some degree of
support and also found support below 1.60 against the dollar.
There
was an improvement in the RICS house-price index to -15% from -18% and a
stronger figure for the BRC retail sales index which provided some
degree of Sterling support. Other data releases were weaker than
expected with a 0.5% dip in industrial production for August following a
revised 2.8% jump the previous month. The trade gap was significantly
wider than expected at GBP9.8bn for August from a revised GBP7.3bn
previously and was the second widest shortfall on record.
There was continuing speculation that the Bank of England could
sanction additional quantitative easing. Bank of England of Governor
King stated that it was the correct decision to let inflation
temporarily rise above the target level. A stronger than expected 0.8%
NIESR growth estimate for the third quarter also failed to have a major
impact as the UK currency was unsettled by a decline in risk appetite.
There
were also still important doubts surrounding the domestic economy,
especially with fresh concerns surrounding the consumer sending outlook.
Bank of England MPC member Weale expressed some concerns over
the potential inflation implications of any further quantitative easing,
although the overall impact was limited with markets still expecting
that the bank will decide to sanction additional bond purchases at the
November meeting.
Swiss franc:
There
has been some underlying reduction in defensive flows into the Swiss
currency. There will still be fears surrounding the underlying
Euro-zone outlook which will maintain the potential for defensive
inflows, especially if Spanish and Italian fears intensify. The National Bank will
maintain its determination to resist franc appreciation and there is
still the possibility of official negative interest rates or capital
controls.
The dollar was unable to sustain a move above
0.94 against the franc and retreated to lows below 0.9350. Although the
Euro recovered from lows near 1.2050, it was unable to make much headway
as the franc gained support from fears surrounding the global growth
outlook.
There were concerns that further delays in Spain
requesting a sovereign support package following the ratings downgrade
would trigger a renewed flood of capital into the Swiss currency which
could put the Euro minimum level under serious pressure again. The franc also gained underlying support from fears surrounding the Euro-zone recession profile.
Swiss consumer
prices rose 0.3% for September with an annual decline of 0.4% which
maintained underlying unease over potential deflationary pressures.
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| Australian dollar |
|
The Australian dollar found support on dips towards the 1.0150 area against the US currency
during the week and advanced back to a peak above 1.0250. Risk appetite
showed some degree of stabilisation during the week on hopes of further
Chinese policy action, but there were still important concerns
surrounding global growth.
The latest labour-market data was stronger than expected with an employment increase of 14,500 for the month which provided some degree of support
Unease
surrounding the domestic growth outlook and continuing vulnerability in
the global economy is likely to keep the Australian dollar generally on
the defensive.
Canadian dollar:
The
Canadian dollar found support close to 0.99 against the US currency
during the week and pushed to highs in the 0.9750 area before drifting
weaker again as markets struggled for direction.
Energy prices
were generally vulnerable during the week which had some negative
impact on the Canadian currency. There was a slightly narrower than
expected trade deficit which did not have a major impact.
It will still difficult for the Canadian dollar to make significant gains given persistent global growth doubts and unease surrounding the threat of lower commodity prices.
Indian rupee:
The rupee reversed course during the week with four consecutive daily losses before finding support close to 54 against the US currency.
Standard & Poor’s stated that there was still an important
downgrade risks for the sovereign rating which had a negative impact on
sentiment.
There were also concerns that reform optimism was not
being met by actual inflows and the currency was also unsettled by
increased dollar buying by importers.
Although underlying dollar vulnerability will continue to offer near-term rupee support, the currency will find it difficult to make much headway.
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| Hong Kong dollar |
|
The Hong Kong dollar found support weaker than 7.7550 against the US currency and pushed to highs around 7.7520 as it approached the strongest level of the band.
The currency gained support from a wider improvement in risk conditions. The currency also secured backing from a stronger Chinese yuan
Medium-term
speculation surrounding the Hong Kong peg is liable to increase,
especially given the sustained and very loose US monetary policy.
Chinese yuan:
The Chinese yuan strengthened considerably during the week with a 19-year high beyond the 6.27 level against the dollar as the PBOC tolerated appreciation.
There
were some speculation that the PBOC was looking for additional yuan
appreciation ahead of the November US presidential election in order to
soothe political tensions.
There were expectations of further
fiscal stimulus and also some evidence of resistance to further cuts in
lending rates. There were still important doubts surrounding the
economy which maintained an underlying mood of caution.
The yuan will
find it difficult to sustain gains given the domestic economic backdrop
as fears over a weaker growth outlook are likely to remain a key
feature.
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