US fiscal policy
will continue to be an important short-term focus with key negotiations
between Congress and the House of Representatives over the next few
weeks and there will inevitably be the threat of brinkmanship which will
tend to unsettle markets and undermine risk appetite. There will also
be continuing unease surrounding the Euro-zone and doubts over the
sustainability of any Chinese improvement which will continue to fuel
the cautious tone.
Key events for the forthcoming week
| Date | Time (GMT) | Data release/event |
| Tuesday November 20th |
| Bank of Japan monetary policy meeting |
| Wednesday November 21st | 09.30 | Bank of England MPC minutes |
| Thursday November 22nd | 08.30 | Germany flash PMI index |
| Friday November 23rd | 19.00 | Germany IFO index |
Dollar:
There
will be further uncertainty surrounding the US economic outlook,
especially with significant distortions from the recent hurricane, but
there will general expectations of solid growth. The Federal Reserve
will remain committed to a very expansionary monetary policy and there
is the possibility of extra bond purchases next year, limiting yield
support. Fiscal policy will remain an important focus with Congress and
the Administration negotiation to avoid automatic tightening next year.
Concerns surrounding the fundamentals will be offset by a potential
deterioration in risk appetite. Fears surrounding the global growth
outlook should also provide some dollar protection.
The dollar secured
slight gains over the week as a whole, primarily reflecting the impact
of yen weakness and the US currency found it difficult to secure further
advances against European currencies.
The headline US retail sales
report was weaker than expected with a 0.3% decline while underling
sales were unchanged, although this followed a series of robust reports
and there was still a mood of cautious optimism surrounding consumer
spending. Underlying uncertainty surrounding fiscal policy remained an
important factor as Congress and the Administration geared up for
crucial negotiations.
The Federal Reserve Minutes
suggested that additional bond purchases might be considered once
Operation Twist is completed at the end of December. Some members
expressed concerns surrounding the potential inflation outlook. There
was a detailed discussion surrounding potential communication for exit
strategies and whether to set numerical targets such a specific
unemployment rate which could trigger a lifting of the Federal Funds
rate. There is a strong probability that the Fed will eventually move
towards guidance on economic conditions.
Data later in the
week was weaker than expected, although there are likely to be
distortions from the impact of Hurricane Sandy. Jobless claims were
substantially higher than expected at 439,000 in the latest week from a
revised 361,000 previously which was an 18-month high. The Philadelphia
Fed index dipped to -10.7 from 5.7 previously while the New York index
was also in negative territory for the month.
| Euro |
There
will be further uncertainty surrounding the Greek situation as the
underlying debt situation remains unsustainable even if the next loan
tranche is granted. There will be major political stresses as the
economy continues to contract with the government close to collapse.
There will also be major concerns surrounding the Spanish outlook as
conditions continue to deteriorate. Even if Germany has the political
and economic commitment to keep the Euro together, the currency is
likely to under-perform due to fears over the growth outlook.
Confidence in the Euro-zone
remains weak with severe economic and political stresses as there were
no resolution of underlying issues. There was still a reluctance to sell
the currency aggressively as it found support below 1.27 against the
dollar.
The German ZEW survey was weaker than expected
with a decline to -15.7 for October following three successive monthly
gains. The deterioration was not a major surprise after a recent run of
weaker than expected data, but did maintain fears surrounding the German
economic outlook. If Germany weakens, then there will inevitably be
fears surrounding the Euro-zone as a whole.
There was speculation from German media sources
that Greece could be given a one-off loan tranche payment of EUR44bn
which pushed the Euro sharply higher. Inevitably, the reports were
denied by the German Finance Ministry which stated that no decision had
been made.
Uncertainty will continue ahead of another Euro-group
meeting expected on November 20th. Greece did raise additional funds
through the latest four-week Treasury bill auction to stave-off
immediate default. There will still be major fears surrounding the
outlook, especially with the economy still contracting. There were also
further concerns surrounding the Spanish economy as benchmark yields
moved close to the 6.0% level.
The Euro-zone third-quarter GDP data
was slightly better than expected, but there was still a 0.1% decline
for the three-month period which confirmed that the economy was
technically back in recession for the first time since 2009 as
peripheral economies continued to contract.
There was
uncertainty surrounding longer-term Greek prospects with ECB council
member Coene stating that a write-off of official debt was likely to
happen eventually, a point of view which will be contested very
aggressively by the German government.
There was some speculation that the Spanish government
would look secure aid from the IMF and circumvent the Euro-zone in
order to lessen the burden of conditionality. Spanish uncertainty tended
to discourage aggressive Euro selling given the possibility of a spike
higher despite an important lack of confidence in the fundamentals.
Yen:
There will be major concerns surrounding the Japanese economy
with particular fears surrounding the corporate sector as exports and
profits remain under intense pressure. The political situation will be
very important as the LDP which is likely to win power if there is an
early election has pledged to push for more aggressive monetary easing
and a weaker yen. The Japanese currency could still gain some
degree of support from a deterioration in global risk appetite,
especially with the potential for capital repatriation.
The yen weakened sharply during the week as a whole with lows beyond 81.40 against the US currency, the weakest level since late April. The Japanese currency also weakened to lows close to 104 against the Euro.
There
was increased speculation that the government would dissolve parliament
and call early elections with a vote likely to be held on December
16th. There are expectations that the DPJ will be subjected to heavy
losses at the election due to deadlock on securing economic reforms.
This damaged the yen due to speculation that a new LDP-led government
would push for a higher inflation target and force the Bank of Japan
into additional quantitative easing.
The yen was subjected to
renewed selling pressure after LDP leader Abe called for unlimited
monetary easing to support the economy and co-operation with the Bank of
Japan to weaken the Japanese currency. Political developments will be
watched very closely as any decision not to hold fresh elections could
trigger a sharp reversal of positions and trigger renewed gains.
The
yen still gained some degree of protection from underlying fragility in
risk appetite with further concerns surrounding the Japanese and Asian
economies.
|
| Sterling |
The Bank of England
may resist further quantitative easing in the short-term which could
underpin Sterling. Economic concerns are, however, likely to increase
again with speculation that there will be another GDP contraction for
the fourth quarter. There will be concerns that the AAA credit rating
will be lost which could trigger a substantial outflow of capital. There
should still be some degree of protection from fears surrounding the
Euro-zone outlook, but Sterling is liable to have a weaker tone given
domestic fundamental concerns.
Sterling dipped to test
support levels below 1.5850 against the dollar and also retreated to
beyond 0.8050 against the Euro, but did prove resilient at lower levels
The
latest unemployment claimant count registered a 10,100 increase for
October after a small increase the previous month and this was the
highest increase for over 12 months. There was a decline in the
unemployment rate to 7.8% from 7.9%.
In the latest inflation report,
the Bank of England increased inflation forecasts slightly while
cutting the 2013 GDP growth estimate to around 1.2% from 1.8%
previously. There were also warnings from the Governor that GDP could
contract for the fourth quarter which increased speculation that the UK
could suffer a triple-dip recession.
King denied that the bank
was running out of options and stated that further quantitative easing
could be considered, although the overall impression was one of
uncertainty. Ratings Agency Moody’s stated that the AAA credit rating
could be lost if the December Autumn Statement suggests that policies
are unsustainable.
The latest retail sales report was weaker than expected with a 0.8% decline in sales for October following a revised 0.5% gain the previous month. The data reinforced
concerns surrounding the growth outlook following Bank of England
warnings earlier in the week that there could be another GDP contraction
for the fourth quarter.
Swiss franc:
There has been some underlying reduction in defensive flows into the Swiss currency,
but there are still major uncertainties surrounding the situation,
especially as recent Treasury bill auctions have continued to record
negative interest rates. Sustained yen weakness could also increase
defensive capital inflows into the Swiss currency. The National Bank
will remain strongly committed to the minimum Euro level in the
short-term.
The dollar was
unable to move above resistance in the 0.95 area against the Swiss franc
during the week and retreated back to the 0.94 region. The Euro drifted
weaker to the 1.2030 area against the Swiss currency before finding some support as the 1.2000 minimum level started to come back into focus.
Speculation
over further downward pressure on the yen will tend to increase the
potential for defensive inflows into the Swiss currency as an
alternative safe-haven asset, especially with global risk appetite
generally fragile.
|
| Australian dollar |
The
Australian dollar was unable to hold above the 1.0450 level against the
US currency during the week and retreated to lows near 1.03 as
sentiment deteriorated. The Australian currency was unsettled by a
downturn in global equity markets.
Domestically, there was a
small decline in business confidence, but this was offset by an
improvement in consumer confidence. The currency gained some degree of
support from speculation that Global central banks were diversifying
into the Australian currency which could be countered by Reserve Bank
sales.
The Australian currency will gain some support
from potential reserve diversification, but there is evidence that the
Reserve Bank will resist further gains.
Canadian dollar:
The
Canadian dollar had a generally weaker tone during the week with a US
test of resistance close to 1.0050, although underlying ranges were
relatively narrow.
There was little in the way of fresh domestic
incentives, although there were some concerns surrounding the housing
sector. The currency was undermined slightly by a decline in oil prices
with fragile risk appetite also having a negative impact.
The Canadian dollar can
prove to be broadly resilient, but net losses are likely against the US
currency given growth fears and potential weakness in commodity prices.
Indian rupee:
The rupee dipped to two-month lows close to 55 against the US currency during the week. Risk appetite was generally fragile during the week with further concerns surrounding the growth outlook.
Trading
activity was curbed by Diwali holidays. Sentiment towards the domestic
economy was undermined by a weaker than expected reading for industrial
production and a record trade deficit which sapped confidence towards
the economy.
Given uncertainties over domestic economic policies
and regional growth concerns, the Indian rupee is unlikely to make much
headway in the short-term.
| Hong Kong dollar |
After
testing the 7.75 area against the US currency, there was slight
depreciation back to the 7.7515 area as capital inflows eased slightly.
Hong Kong Financial Secretary Tsang
rejected calls for a review of the currency peg, but here was still
inevitably speculation over reforms, especially with increased fears
surrounding inflation and asset prices.
Even if immediate
pressures on the band limit ease very slightly in the short-term,
medium-term speculation surrounding the Hong Kong peg will continue.
Chinese yuan:
The yuan maintained a strong tone during the week and edged through the 6.23 level against the US currency as the PBOC fixed the yuan beyond the 6.30 level.
There
was a wider trade surplus for October which helped underpin confidence
to some extent. Political considerations were generally dominant during
the week as the new Standing Committee was announced. There was some
uncertainty surrounding monetary policy as PBOC head Zhou was not
re-appointed.
International political pressure for a
strong yuan will fade and there is also likely to be domestic
resistance to currency gains as industrial stresses are likely to
increase.
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