Risk appetite remained restrained following comments by German Chancellor Merkel that a joint euro bond was the "wrong solution". Merkel then went on to say that the ECB "can choose its own means of currency stability". ECB President Draghi defended the ECBs independence, but suggested that some degree of flexibility as he said 'other elements' could track if there is a 'fiscal compact, binding governments to stronger public deficit and debt rules'. Risk currencies continued to find buyers as the coordinated central bank action has spurred hope that European policymakers will announce a cure all next week. EURUSD rallied in mid Asia session from 1.3450 to 1.3481 while AUDUSD rose from 1.0208 to 1.0255. Asian equities indices were mixed with the Hang Seng up 0.67% while Shanghai dropped -1.10%. . There has been some marginal contraction in yield spreads. In the last few days Sarkozy, Merkel, Draghi and Monti has given us the idea that a tighter fiscal union is coming to Europe. This new fiscal agreement would install stricter budget discipline and debt control however, there has been little details how the United nations of Europe would enforce these new compact. Sarkozy and Merkel have promised to submit joint proposals for EU treaty changes on that score next week. While the optimism on the political front has been moving the market, the economic data is nothing to get excited about.
Eurozone Nov purchasing managers survey, indicates that the region is falling into a deeper recession than originally forecasted. Interestingly, while on the other side of the Atlantic the US has seen its manufacturing sector strengthen. The first thing that we suspect to happen next week will be that the European central banks, reacting to the collapsing regional economic data, will cut key interest rates 25bp to 1.00%. In addition, the ECB will most likely try and reinforce the year's liquidity operation by offering longer term loans to banks in the 2 to 3 year maturities range. However, the central banks will continue to reject the demands to become the lender of last resort, by printing money to buy massive quantities of toxic European sovereign debt, to potentially end this cycle of the European credit crisis. That said, these events are merely short term in duration and the erosion in PMI suggests that longer term structural and competitive problems will continue to threaten the union. European data is now showing suffering from high inflation and growing unemployment. As we all know, these were the two crucial ingredients to this year's Arab spring and could easily ignite the populist movement. But, I digress. In the short term, while we are still surprised by the resiliency of equity markets and the spillover affect in to FX, we are cautiously following the trend.
It’s been was a tough week for Swiss economic data with weak reads in Kof and GDP Q3. Today Swiss retail sales y/y printed at a weak -0.2% vs. 0.0% exp while prior read was adjusted lower to -1.4% vs. -0.9%. While yesterday Swiss Q3 GDP has also come in lower than expected, with a yearly increase of 1.3%, 0.2%q/q. The price action in EURCHF hints that traders are interpreting the string of soft data as indications that the SNB will adjust the “floor” higher. Clearly the Swiss economy is buckling under the weight of weak global growth, direct exposure to the European debt crisis and the spillover result of indications of deflation. While perhaps not the only reason for the difficult position Switzerland is trending, clearly the “overvalued” Franc has not helped. Yesterday, the Swiss government stated that it would "examine the feasibility of supporting measures within the context of an overall consideration," which was interpreted to consider using negative interest rates. However, speculation that the SNB will combat the current dilemma with direct FX interventions (15th Dec most likely date for announcement) is growing and most likely push EURCHF higher.
For today all eyes will be on the US labor data. Earlier in the weak ADP print came in at 206k, significantly above consensus of 110k. The stronger than expected read has economists increasing Fridays NFP and private payrolls significantly. The sudden adjustment will undoubtedly create uncertainty as to the “expectation”, which in turn will increase the reaction. Bloomberg is now stating that NFP is expected at 125k, Private Payrolls 150k and Unemployment rate stable at 9.0%. The streets whisper number is close to 25K above the official median. The recent trend in the US economic data has been brisk suggesting that the US will steer well clear of a contraction in Q4 and has decent momentum going into 2012.
Eurozone Nov purchasing managers survey, indicates that the region is falling into a deeper recession than originally forecasted. Interestingly, while on the other side of the Atlantic the US has seen its manufacturing sector strengthen. The first thing that we suspect to happen next week will be that the European central banks, reacting to the collapsing regional economic data, will cut key interest rates 25bp to 1.00%. In addition, the ECB will most likely try and reinforce the year's liquidity operation by offering longer term loans to banks in the 2 to 3 year maturities range. However, the central banks will continue to reject the demands to become the lender of last resort, by printing money to buy massive quantities of toxic European sovereign debt, to potentially end this cycle of the European credit crisis. That said, these events are merely short term in duration and the erosion in PMI suggests that longer term structural and competitive problems will continue to threaten the union. European data is now showing suffering from high inflation and growing unemployment. As we all know, these were the two crucial ingredients to this year's Arab spring and could easily ignite the populist movement. But, I digress. In the short term, while we are still surprised by the resiliency of equity markets and the spillover affect in to FX, we are cautiously following the trend.
It’s been was a tough week for Swiss economic data with weak reads in Kof and GDP Q3. Today Swiss retail sales y/y printed at a weak -0.2% vs. 0.0% exp while prior read was adjusted lower to -1.4% vs. -0.9%. While yesterday Swiss Q3 GDP has also come in lower than expected, with a yearly increase of 1.3%, 0.2%q/q. The price action in EURCHF hints that traders are interpreting the string of soft data as indications that the SNB will adjust the “floor” higher. Clearly the Swiss economy is buckling under the weight of weak global growth, direct exposure to the European debt crisis and the spillover result of indications of deflation. While perhaps not the only reason for the difficult position Switzerland is trending, clearly the “overvalued” Franc has not helped. Yesterday, the Swiss government stated that it would "examine the feasibility of supporting measures within the context of an overall consideration," which was interpreted to consider using negative interest rates. However, speculation that the SNB will combat the current dilemma with direct FX interventions (15th Dec most likely date for announcement) is growing and most likely push EURCHF higher.
For today all eyes will be on the US labor data. Earlier in the weak ADP print came in at 206k, significantly above consensus of 110k. The stronger than expected read has economists increasing Fridays NFP and private payrolls significantly. The sudden adjustment will undoubtedly create uncertainty as to the “expectation”, which in turn will increase the reaction. Bloomberg is now stating that NFP is expected at 125k, Private Payrolls 150k and Unemployment rate stable at 9.0%. The streets whisper number is close to 25K above the official median. The recent trend in the US economic data has been brisk suggesting that the US will steer well clear of a contraction in Q4 and has decent momentum going into 2012.
By
M.Zohaib Gadit
Forex Trading Consultant
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