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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