Forex Blog

December 11, 2011

Trading Week Outlook: Dec. 12 – Dec. 16

Filed under: Forex News — Tags: , , , , , , , , — admin @ 8:05 am

Dec. 10, 2011 (Allthingsforex.com) – In the aftermath of the ECB rate cut and yet another EU Summit attempt to save the euro, in the week ahead all eyes will turn to the FOMC monetary policy meeting in search for the missing piece of the QE3 puzzle.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    GBP- U.K. CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of England, Tues., Dec. 13, 4:30 am, ET.

Rising by 5.2% y/y in September, U.K. inflationary pressures have begun to subside to 5.0% y/y in October, and are expected to continue lower to 4.8% y/y in November. The pullback in inflation is in line with the Bank of England’s forecast and would be welcomed by policy makers set to continue the bank’s accommodative monetary policy, while keeping the door open to more quantitative easing if the economy weakens further.

2.    EUR- Euro-zone ZEW Economic Sentiment Index, a leading indicator of economic conditions and business expectations, Tues., Dec. 13, 5:00 am, ET.

Serving as a reminder of the deteriorating economic conditions in the Euro-zone, the ZEW economic sentiment index is forecast to register another drop with a reading -60.3 in December, compared with -59.1 in November.

3.    USD- U.S. Retail Sales, an important gauge of consumer spending measuring the total receipts at retail establishments, Tues., Dec. 13, 8:30 am, ET.

Consumer spending is a major part of the U.S. economy and retail sales could demonstrate resilience with a second consecutive monthly increase by 0.6% m/m in November from 0.5% m/m in October.

4.    USD- U.S. FOMC- Federal Open Market Committee Interest Rate Announcement, Tues., Dec. 13, 2:15 pm, ET.

At the press conference following the last FOMC meeting, the Fed Chairman made it clear that all options are “on the table”, including a “third round of securities purchases, extending the period of record- low interest rates or being more specific about when rates would rise”. Although the Fed could keep the door open to QE3, the recent resilience of the U.S. economic data, which rules out a double dip, makes an announcement of another round of quantitative easing less likely to come at the December 13 meeting. As far as the record low rates, the Fed has already made a commitment to keep the status quo at least until 2013. For the time being, expect a continuation of the Fed’s accommodative monetary policy with QE3 ready to be deployed in case future economic conditions and the EU debt crisis take a turn for the worse. The USD might be able to attract some bids if the Fed puts QE3 on the back burner.

5.    GBP- U.K. Jobless Claims and Unemployment Rate, the main gauges of employment trends and labor market conditions, Wed., Dec. 14, 4:30 am, ET.

Following the anticipated pullback in inflation, the U.K. employment report has the potential to become another risk event for the pound. Forecasts point to an increase in the amount of jobless claims by up to 17,000 in October from 5,300 in September, while the unemployment rate stays unchanged at 8.3%.

6.    JPY- Japan Tankan Index, Bank of Japan’s quarterly survey of large and small manufacturing and services companies, which serves as the main indicator of economic conditions in Japan, Wed., Dec. 14, 6:50 pm, ET.

The Japanese economic activity slowed significantly in Q2 2011 as a result of the devastating earthquake and tsunami but recovered in the third quarter, however the Bank of Japan’s benchmark survey is expected to underline some weaknesses with a manufacturing sector index reading of -2 from 2 in Q2 and a flat services sector reading of 1, same as the second quarter.

7.    CHF- Swiss National Bank Interest Rate Announcement, Thurs., Dec. 15, 3:30 am, ET.

With deflationary pressures mounting, the strong franc hurting exporters and the economy, and the euro incapable of appreciating beyond its recent range versus the franc, it would not be a surprise to see the Swiss National Bank forced into additional action to curb the strength of its currency. The “mystery” surrounding the next step of the SNB has managed to keep the euro above the minimum exchange rate target of 1.20 against the franc. However, it may be only a mater of time before the Swiss National Bank gives in to political pressure for much bolder measures, including raising the EUR/CHF exchange rate floor from 1.20 to 1.30.

8.    EUR- Euro-zone HICP- Harmonized Index of Consumer Prices, the main measure of inflation, Thurs., Dec. 15, 5:00 am, ET.

Despite of the stubbornly high inflation, fighting it has not been the current focus of the European Central Bank and the latest rate cuts were a testament to the bank’s new priority- stimulating economic growth in an effort to avoid a double dip. Although inflationary pressures in the Euro-zone are expected to remain unchanged at 3.0% y/y in November, same as the 3.0% y/y reading in October, expect the European Central Bank to continue to “look the other way”.

9.    USD- U.S. Jobless Claims, an important gauge of employment trends and labor market conditions, Thurs., Dec. 15, 8:30 am, ET.

Throughout 2011, this weekly column has regularly mentioned 375,000 as the number to watch as a leading indicator of consistent improvement in the U.S. job market and future decline in the unemployment rate. Consensus forecast are pointing to a move higher to 389K, but with last week’s drop to 381,000, the jobless claims have registered a nine-month low and are approaching the 375K mark.

10.    USD- U.S. CPI- Consumer Price Index, the main measure of inflation, Fri., Dec. 16, 8:30 am, ET.

Inflation would probably remain a non-issue for the Fed with forecasts expecting a flat 2.1% y/y reading in the November Core CPI, which excludes volatile food and energy costs.

November 28, 2011

Forex Market Outlook 11/28/11

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 6:51 am

The markets are off to a quick start this morning after last week’s worst-performing stock market since the Great Depression.  Global stocks are soaring this morning, as are commodity prices, particularly oil.  The Dollar is lower with risk currencies (including the Euro) moving higher.

There are two obvious factors at work this morning, but there is also a renewed hope that EU leaders will be increasing efforts to stem the debt crisis.  There is a 2-day EU Finance Ministers’ conference starting tomorrow and the debt crisis is obviously going to be the main topic of conversation.

As to what has moved the markets this morning, the first was a rumor that the IMF was prepared to make a huge loan (around 600 billion euro) to Italy in order for them to deal with rising debt costs.  This “bazooka” type action has since been denied by the IMF and is not likely to materialize.  What is more likely is that EU leaders are going to feel intense pressure to quit their bickering and solve the crisis.  The markets have spoken through last week’s sell-off so if they can’t get something accomplished in short order, it’s likely bye-bye Euro.

The other factor moving markets higher this morning is the reports of a large increase of retail sales from “Black Friday” here in the US, largely known as the biggest shopping day of the year.  I watched in amazement the reports of people pepper-spraying one another to buy stuff so for an economy that relies some 70% on consumer spending, I supposed this type of behavior is a good thing.

Today is “Cyber Monday” which is supposed to encourage on-line shopping for the holiday season so a good number from today’s activity could show that the US consumer is not dead just yet.  However with 9% unemployment, there are many who won’t be doing any shopping and this is a larger concern.

On Friday we will get the Non-Farm Payrolls (NFP) report which will show how many jobs have been added to the economy last month.  The expectation is for a gain of 120K jobs and for the unemployment rate to remain steady at 9%.  It is doubtful that seasonal hiring will show up in this report.

With such stubbornly high unemployment, it is no surprise that many are now saying that they expect QE3 to be unleashed on the markets as inflation expectations are supposed lower.  But with $100 oil and the seasonal demand that comes with colder weather, in my opinion inflation is already upon us and it is disingenuous at best to suggest otherwise,

But we will likely hear just that on Wednesday when the Fed releases its Beige Book Economic Survey.  So expect to hear the same tune from the Fed as little has changed for as we know by the failure of the debt super-committee, Washington DC is content to do nothing for the people they purportedly represent.

This lack of confidence is glaring and tomorrow’s Consumer confidence figures being reported both here in the US and in the EU will be telling.  For the majority of what plagues us stems from a crisis of confidence.  There is very little leadership today that leads people to believe that solutions are attainable so activity continues to spiral lower as fear persists.

Apparently the start of what’s known as the “Santa Clause Rally” may be starting early with this morning’s market activity.  Or perhaps it is a bit of short-covering or profit taking ahead of this weeks news.  Either way, fund managers who need a strong month to show decent performance numbers would love nothing more than to see this market rally into the year end so absent a complete Euro melt-down, we may get just that.

October 28, 2011

Does the Dollar have Mojo?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:30 am

G10 currencies are trading in a well contained range after yesterday’s miraculous recovery amongst risk assets. The selling of the greenback does not seem to be trading in an overextended scenario in either position or price action. Most would have predicted that the dollar should have already come too the fore this morning, citing an “over zealous market” since the Euro agreement of their comprehensive package.

Investors continually look at global bourses for direction, they have been the key drivers behind the dollars move. Manufacturing data in the US and China showing signs of improvement can only push equities higher and dollar lower. Next week is another busy week with rate announcement from the ECB and Fed and of course reports on the all important job situation. However, with these markets turning on a dime is leaving little room for reflection.

Forex heatmap

The market breathed a little easier after US data yesterday. US Q3 GDP estimate reported a +2.5% annualized increase, stronger than the preceding three quarters and thankfully a significant improvement on the first half of this year. It seems that the consumer has come out to play. They have reduced their savings to boost purchases while at the same time companies stepping up their investment in equipment and software. The only negative in the breakdown being a sharp slowing down in inventory growth. Final sales (GDP less inventories) rose by a solid +3.6%, proof that there is strong demand. However, the biggest drop in incomes in two-years (-1.7%), along with declines in home prices and consumer confidence, certainly casts doubt on whether the increase in spending can be sustained. Obama team needs to get “the jobs machine going” and get the housing market moving in the right direction otherwise the US economy remains in a low-to-moderate growth mode and vulnerable to setbacks. In that scenario, the Fed and its Q3 most surely come to the fore.

Core (+2.1%) and headline PCE (+2.4%), inline with expectations, suggests that the underlying inflationary momentum is as how the Fed likes it. They next meet next week. Digging deeper, consumer spending (+70% of GDP) rallied +2.4% with the increase mostly spent on durables (+4.1% in autos). Fixed investment was up a staggering +13.7%, corporations are finally beginning to loosen their purse strings. The only negative was inventories, where growth slowed to a crawl, falling -1.1%. The reason why? It was weather for farmers, restraints in Japanese imports, and perhaps an unexpected improvement in demand. The weakness in disposable income should remain the biggest outlier as we head towards 2012.

Better than expected claims chipped in yesterday and helped to improve investor’s intraday mood. New weekly claims fell ever so slightly last week (-2k to +402k), yet remain elevated and above that psychological +400k print. The more reliable indicator, the four-week moving average edged higher +1.75k to +405k. Despite spending more on fixed investment in the Q3, companies are unwilling to hire en masse. Even Obama’s jobs bill is having trouble, it has met resistance from opposition in congress whom oppose new spending. Now his administration is trying to get it through by piecemeal. The number of continuing claims (one week lag) was +3.645m, down -96k w/w. Have previous claimants got a job or have they just run out of benefits? Next week we get NFP.

The dollar is higher against the EUR -0.03% and CHF -0.26% and lower against GBP +0.11% and JPY +0.11%. The commodity currencies are mixed this morning, CAD +0.03% and the AUD -0.39%.

The loonie certainly went partly along for the ride outright, however, on the crosses it has performed poorly. There are good corporate bids near the dollar lows despite “risk on” in other asset classes. The loonie has been well underpinned by improved risk appetite after Europe finally put together a comprehensive package which is lacking detail, it’s seen as a sign of good faith. The CAD outright seems to be trading as a pricing vehicle for the beleaguer CAD/JPY and EUR crosses. It’s all about fair value.

Governor Carney this week certainly has given the market ‘food for thought’. The BoC has quashed expectations of interest rate hikes and downgraded its growth forecasts, citing Europe’s debt crisis and weakness in the country’s top trading partner south of its own border. The MPR reported that the annualized pace of expansion will average +1.8% in the four quarters through June, compared with a previous estimate of +2.8%. The bank cut its projection for global growth next year by-0.9%, and it said the recovery will be slower than usual as consumers, governments and businesses reduce debt.

It seems that dealers are moving further out the curve and are beginning to slowly price in rate hike in the latter half of next year when inflation indicators begin to move toward the Banks+2% inflation benchmark. Carney is also predicting that the Canadian economy grew +2% in Q3 and will grow at +0.8% rate in Q4.

Where does this put the loonie? Well, it does not put it in the same risk and growth category as the Aussie or Kiwi. The loonie remains vulnerable to what happens in the US. Carney’s comments are transparent, they are concerned about sustainable growth and the market will have to be cautious in trying to push the currency higher at speed. Corporate buyers remain below as dealers focus on the risk reward of owning the loonie at these levels (0.9902)

The antipodeans lead the pack this week. With the RBNZ keeping rates on hold and given the positive EU summit outcome, is providing the basis for a more meaningful recovery in global risk appetite in the near term, supporting the Kiwi and Aussie. In the O/N session, the AUD has fallen from its highest level in almost two months against the greenback as traders speculate that the currency’s biggest advance in more than a year was too rapid.

Even the fear that Australian domestic data showing that underlying inflation slowed last quarter, to its weakest pace in 14-years (+0.3% vs. +0.6%), which would allow the RBA to cut the developed world’s highest borrowing costs next week, is finally being appreciated by investors. Despite futures traders pricing in a-25bp cut, the AUD will remain at the mercy of global developments and progress in the Euro-zone debt aid package. The currency depreciated almost-10% last quarter on the back of weaker employment growth and global risks increasing.

How long will Euros euphoria have investors demanding the AUD? US growth numbers this morning will of course hold considerable weighting on that answer. The market is a better seller of the currency on rallies (1.0674).

Crude is lower in the O/N session ($93.21 down-0.73c). Oil prices got the green light to march higher after Euro policy makers agreed on measures to tame a sovereign debt crisis that threatened to slow economic growth. Being the world’s most dominant consumer of crude, the US economy growing at an annual rate of +2.5% last quarter is also supporting prices and this despite elevated weekly inventories.

Last week’s EIA report showed that crude stockpiles rose +4.74m barrels to +337.6m vs. an expected build of +1.3m. Oil imports rose +1.45m barrels per day to +9.34m. On the flip side, gasoline stocks fell -1.35m barrels to +204.9m, slightly smaller than the -1.6m expected drawdown. The average gasoline demand in the last four-weeks fell -0.7% from a year ago. Distillates, which include heating oil and diesel, happened to fall -4.28m barrels to +145.4m. Analysts had been expecting a +1.9m barrel draw. The refinery utilization rate increased +1.7% points to +84.8% of capacity.

The rise in stocks is in marked contrast to recent price rallies. Brent’s premium over WTI has again widened. Expect investors to continue to run into technical selling on rallies as they wait for a clearer idea of what the ECB and Fed will want to do next week.

Gold prices steadied yesterday after a deal by the Euro leaders to tackle the euro zone debt crisis and a positive reading on US growth encouraged investors to delve back into riskier assets and to boost their bullion holdings. Investors have an appetite and desire for a safe-haven alternative to equities or FX. They seem to want to insulate themselves from steeper price falls. The disappointing US consumer confidence print earlier in the week provided the impetus for metal to rally as the data showed consumers were at their gloomiest in 2-1/2 years. The bullion is in its eleventh-year of a bull market and is up +21% this year.

The commodity has also found support (store-of-value) on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. Over the past two-weeks, commodities have followed the moves in riskier assets, with the precious metal’s safe-haven appeal diminishing a tad after the price purge swings in the past quarter. Stronger Chinese growth is also providing a source for support. Last week, the yellow metal rallied the most in a week, as a drop in the dollar boosted investor demand.

With global sentiment in the fragile category, gold remains the go to safer haven prospect. If we include the demand for ‘physical’ gold from India, then both of these reasons should provide the strongest tangible support to want to own some on pullbacks ($1,737 down-$10).

The Nikkei closed at 9,050 up+124. The DAX index in Europe was at 6,411 up+74; the FTSE (UK) currently is 5,736 up+22. The early call for the open of key US indices is higher. The US 10-year backed up +16bp yesterday (+2.40%) and is little changed in the O/N session.

The market has reacted positively to the Euro leader’s comprehensive debt package, despite it lacking full disclosure. Benchmark yields have been able to rally to two-month highs. The market realizes that there is much cash remaining on the side lines and a great deal of it could be put to work if investors could be convinced that the European situation will not spiral into disarray. The market also made it easier to “push about” the last of this week’s Treasury supply, yesterday’s $29b seven-year notes. The dealing desks have also reduced their short-dated holdings ahead of selling from the Fed as a part of it’s +$400b “Operation Twist” program.

The $29b 7-year auction was horrible compared to the 2’s and 5’s earlier in the week.
They were sold at a yield of +1.791%, much higher than the +1.759% yield before the sale. The bid-to-cover was 2.59, a two and a half year low compared to the four–sale average of 2.75. Indirect buyers bought +33.9% of the offering compared to +41.3%. “Dealers still own these puppies”.

October 22, 2011

Trading Week Outlook: Oct. 24 – Oct. 28

Filed under: Forex News — Tags: , , , , , , , , , , — admin @ 8:17 am

Oct. 22, 2011 (Allthingsforex.com) – The week ahead will bring a sequence of monetary policy announcements by three central banks and a long slate of important economic reports from the world’s largest economy, but once again the EU Summit will steal the show as traders ponder if the EU leaders will be capable of solving the debt crisis or if they will continue to postpone the “day of reckoning”.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    NZD- New Zealand CPI- Consumer Price Index, the main measure of inflation preferred by the Reserve Bank of New Zealand, Mon., Oct. 24, 5:45 pm, ET.

Two days ahead of the Reserve Bank of New Zealand’s monetary policy meeting, the quarterly CPI report could add to the reduced odds of a rate hike in the near term, with inflationary pressures forecast to subside to 0.8% q/q in Q3 from 1.0% q/q in Q2 2011.

2.    CAD- Bank of Canada Interest Rate Announcement, Tues., Oct. 25, 9:00 am, ET.

Despite of the rise in the Canadian CPI to 3.2% y/y, the index is still below the March peak at 3.7% y/y and since growth is the main agenda of the Bank of Canada, at this point the bank would be likely to refrain from tightening, keeping rates at the current 1.0% level.

3.    USD- U.S. Consumer Confidence Index of consumers’ outlook on present and future economic conditions, Tues., Oct. 25, 10:00 am, ET.

The consumer sentiment data could start the week’s list of what is expected to be more optimistic U.S. economic reports with the index forecast to increase to 46.0 in October from 45.4 in September.

4.    AUD- Australia CPI- Consumer Price Index, the main measure of inflation preferred by the Reserve Bank of Australia, Tues., Oct. 25, 8:30 pm, ET.

In its latest meeting minutes, the Reserve Bank of Australia stated that the “inflation outlook appeared less concerning” and if the CPI report confirms these expectations, the market could begin to push further expectations of a RBA rate hike. The Australian inflation gauge is forecast to pull back to 0.7% q/q in Q3 2011 from 0.9% q/q in the second quarter.

5.    EUR- EU Summit of leaders of the 27 countries in the European Union, Wed., Oct. 26, tentative, all day event.

All eyes will be centered on the EU Summit when the markets around the world expect to see the promised “comprehensive strategy on the euro-area sovereign debt crisis”. This additional summit, which follows the one from October 23, is scheduled to take place by October 26 because EU leaders needed more time to finalize their new plans on how to prevent further contagion, recapitalize banks, expand EFSF, and conclude discussions on the next bailout installment for Greece. “Better late than never” optimism that EU leaders have finally realized the seriousness of the situation after about 2 years since the beginning of the crisis, has helped investor sentiment and risk appetite, with the euro registering its biggest rally since March, 2009. A lot is riding on this summit and if the EU leaders deliver anything short of spectacular, disappointment and risk aversion could quickly set back in, renewing the pressure on the single currency.

6.    USD- U.S. New Home Sales, an important gauge of housing market conditions measuring the number of newly constructed homes with a committed sale during the previous month, Wed., Oct. 26, 10:00 am, ET.

Although not at all impressive, in the “new normal” market environment even a rise of 5,000 might be considered as a positive sign, as the new home sales are expected to register a small increase to 300K in September from 295K in August.

7.    NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Oct. 26, 4:00 pm, ET.

The Reserve Bank of New Zealand would probably steer further away from monetary policy tightening, following the direction set by all other major central banks as they all recently refocused on helping economic growth. The benchmark rate is expected to be left unchanged at 2.50%.

8.    JPY- Bank of Japan Interest Rate Announcement, Thur., Oct. 27, around 12:00 am, ET.

With the yen registering new record highs against the U.S. dollar, it would be interesting to see what the Bank of Japan has to say and do about the persistent strength of their currency. This is provided that they haven’t intervened by the time the meeting takes place, as intervention is becoming a likely event, especially if the dollar breaks even lower.

9.     USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world’s largest economy, Thurs., Oct. 27, 8:30 am, ET.

The preliminary estimate of the U.S. Q3 GDP could instill some optimism with the U.S. economy forecast to regain momentum and grow by 2.0% q/a in the third quarter, compared with 1.3% q/a in Q2 2011.

10.    USD- U.S. Personal Income and Outlays, a measure of the income received and purchases made by consumers, released along with the Personal Consumption and Expenditures Price Index- a leading indicator of inflation preferred by the Federal Reserve, Fri., Oct. 28, 8:30 am, ET.

Expected to be another potentially positive U.S. economic report, the consumer spending is forecast to register an increase by 0.6% m/m in September from 0.2% m/m in August and personal income to rise by 0.4% m/m from -0.1% m/m in the previous month, while the Fed’s preferred inflation gauge, the core PCE Index, is expected to show inflationary pressures remaining flat at 0.1% m/m in September, same as the 0.1% m/m reading in August. 

October 18, 2011

Bank of England Struggles With Slow Growth, Rising Inflation

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 2:55 pm

The Bank of England and Governor Mervyn King face a desperate dilemma – allow the economy to continue its downward path, or attempt to boost growth through further quantitative easing. The catch of course is that with the promise of more “easy” money, comes a greater risk of pushing inflation – which is already a top-level concern – even higher.

For the month of September, inflation as measured by the Consumer Price index (CPI)surpassed all earlier projections jumping to a three-year high of 5.2 percent. Sharp increases in gas and electricity were mostly responsible for the hike but the cost of most household goods also rose as noted with a 5.6 percent hike in the Retail Price Index (RPI).

The Bank of England is tasked with implementing policy to maintain inflation as near as possible to 2 percent annual growth. If inflation deviates from this target by more than 1 percent in either direction, Governor King must send a letter to the Chancellor of the Exchequer to explain why the target was missed. The Governor has written many of these letters of late and will be writing yet another following September’s results.

For Britain’s beleaguered consumers, it must feel as though the walls are closing in. In addition to surging inflation, unemployment is at a 17-year high of 8.1 percent. It is hardly surprising then that consumer spending is down 0.9 percent year-over-year and this is particularly distressing as consumer spending accounts for two-thirds of Britain’s economic activity. Until consumer spending returns to more typical levels, recovery in the larger economy is out of the question.

In fact, officials are already preparing the public for another expected uptick in inflation in October as energy rates are scheduled to increase yet again. After this next round of price hikes, however, energy costs are expected to hold steady until later in the new year. For a population suffering through more than two years of elevated inflation, any promise that the rate of increase in the cost of living must be seen as a form of relief. A pause in inflation may also provide the Bank of England with a window of opportunity to engage in further quantitative easing.

Minutes from the September meeting of the Monetary Policy Committee indicate that the MPC members are lining up in favor of adding another £75 billion ($118.4 billion) to the £200 billion ($315.7) already committed to the easing program. This has increased speculation that the Bank will inject more money into the economy by expanding its program of purchasing gilts directly from financial institutions thereby making more money available for lending.

October 7, 2011

Week In FX: October 2-7

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 11:56 am

Another week not for the faint hearted. Bernanke was to blame for instigating ‘Turnaround Tuesday’. In his congressional testimony he was prudently efficient and forthright and not overtly cheerful about the state of the US economy. His dour understanding of the fundamentals led the market to understand that some large scale stimulus, or so called quantitative easing, was still in the Fed’s arsenal.

Fitch downgrading Italy and Spain had Friday ‘flat lining’, only hours after the market embraced risk because of a better than expected NFP print. Without any firm European recapitalization announcement, dealers are trading on speculation.

The ECB announced new liquidity measures this week but disappointed hopes for outright policy easing. In contrast, the BoE defied consensus expectations and delivered a significant new installment of quantitative easing. Before departing, Trichet reminded us that “we are in a global crisis”. In a few weeks a new man will be held responsible, Mario Draghi, the new president of the ECB.

Below are some of the highlights of the week:


EUROPE

  • FR: BoF Governor Noyer argued that ECB purchases of peripheral sovereign debt should remain limited and that they should not monetize debt. He has ruled out increasing the size of the EFSF, but endorsed leveraging the fund to increase its ability to intervene.
  • EU: Manufacturing PMI was revised a touch higher to 48.5 with upward revisions in both France and Germany. The declines have been modest with the exceptions of Ireland and Spain. Italian PMI surprised strongly on the upside, rising to 48.3 from 46.5 in August. Headline print consistent with sluggish growth in core economies and contraction in the periphery. This makes fiscal adjustments a constant challenge.
  • GBP: Manufacturing PMI rose to 51.1 in September from 49 in August, above expectations for a decline to 48.5. New orders pushed above 50 from 48, although export orders were very weak at 45 from 47.9, reflecting weaker demand from the euro area.
  • CHF: Swiss PMI fell to 48.2 this month, below the 50-points threshold for the first time in two-years (weakness was broad based) and in line with the KOF barometer and ZEW indicator. Analysts expect GDP growth rates to be at or close to zero in Q3 and Q4.
  • EU: Juncker stated that the Eurogroup meeting next week would be cancelled, indicating that the Troika report will not be ready.
  • GR: Greece’s finance minister has been guiding market expectations towards a November disbursement, noting that Greece has no coupons to pay and has sufficient cash to make it into November.
  • SPN: Spanish ‘unemployment’ rose +96K in September, or +79K on a seasonally adjusted basis (highest monthly increase in two-years).
  • TRY: Turkey cuts the 1-year FX reserve requirement ratio from 9.5% to 9.0%.
  • PLN: Poland central bank keeps rate unchanged at +4.50% as expected.
  • ITL: Moody’s downgraded Italy’s sovereign ratings by three notches to A2
  • UK: UK construction PMI fell to 50.1 in September from 52.6 in August, well below consensus of 51.6. This adds to signs of weak growth momentum in the UK.
  • UK: FT reported that EU finance ministers are planning a coordinated recapitalization of European financial institutions.
  • USD: WSJ took a different view and reported that European policymakers may be pushing for a larger restructuring of Greek debt to bring it back in line with S&P’s rating.
  • EU: IMF director Borges suggested that they could create an SPV (Special Purpose Vehicle) to buy Italian and Spanish debt alongside the EFSF, and that the PSI (Private Sector Involvement) provisions need to be changed to account for larger private sector losses.
  • SPN, ITL: Spanish and Italian services PMI fell further into contraction in September, at 44.8 and 45.8 respectively and consistent with further contraction in growth in Q3.
  • Core-EU: German and French services PMI were revised lower to 49.7 and 51.5 respectively. The overall Euro area composite PMI fell to 49.1 in September from 50.7 in August, the fifth consecutive monthly decline.
  • UK: Services PMI rose to 50.2 from 48.8 in August and the new business subindex increased to 54.1 from 53.4. Combined with the stronger manufacturing survey brought the composite PMI +1.2 index point higher to 52.9 this month.
  • UK: GDP revisions showed that the economy expanded only +0.1%, q/q in Q2, down from +0.2%, with sharp downward revisions to private consumption and exports.
  • FT: Reported that the EBA (European Banking Authority) will reexamine its stress tests to include haircuts to sovereign debt.
  • GER: German Chancellor Merkel acknowledged the need for recapitalization and the urgency for action. She seems to favor a program that would give banks more time to try to raise capital from the markets, before turning to their own governments for capital. Market can expect to wait until the Eurogroup meeting on 17/18 October for clarity.
  • IMF: Europe director has had to retract a statement proposing IMF involvement in an SPV to buy euro area debt. IMF is currently only allowed to lend to countries directly.
  • GER: August factory orders fell -1.4%, m/m. Domestic orders fell -3.2% and were the main driver behind the weakness.
  • CHF: Inflation surprised on the upside due to a statistical effect (change in assessment timing). CPI rose +0.3%, m/m this month, pushing headline inflation to +0.5%, y/y from +0.2%.
  • CHF: SNB reported FX reserves rose to CHF282b in September up from CHF253b, due to intervention, valuation of assets and net flows related to FX forwards/swaps contracts used to inject CHF liquidity.
  • BoE and ECB: Both kept rates on hold at +0.5% and +1.5% respectively, increased liquidity and expanded QE. BoE hiked APP (Asset Purchase program) to GBP+275b and ECB to buy covered bonds and conduct two longer term refi-operations.
  • GER: Industrial production fell-1%, m/m, in August after a +3.9% rise in July. This bodes well for 3rdQ GDP, but the deterioration in leading indicators suggests growth momentum is likely to slow further in the months ahead.
  • UK: Moody’s plans to downgrade 14 UK banks and building societies by up to three levels.
  • GER: Chancellor Merkel meets Sarkozy in Berlin on Sunday.

AMERICAS

  • USD: US Manufacturing unexpectedly accelerated (51.6) in September as production picked up, easing some of the concerns that the world’s largest economy is stalling.
  • USD: US Factory Orders fell -0.2%, and this after rising a downwardly revised -2.1% in July. A sharp decline in auto orders was to blame for the negative prints.
  • USD: ADP report recorded a +91k private job gain. Last month’s release was revised down by-2k to +89k.
  • USD: Business conditions in the US non-manufacturing sector were little changed month-over-month (53 vs. 53.3). In the sub-components, employment fell (48.7) and price pressures eased (51.9).
  • CAD: Building Permits down -10.4% vs. +0.4%
  • USD: Weekly claims adjusted to +401k and continuing claims to +3.7m
  • CAD: Canada hires +60.9k full-time. The unemployment rate fell -2 ticks to +7.1%. A misleading headline, heavily weighted towards education +38k and self-employed.
  • USD: NFP beats market consensus +103k, UE rate static at +9.1% and prior months revision up +57k.

ASIA

  • CNY: China’s manufacturing PMI rose to 51.2 this month from 50.9 in August (second consecutive gain, export orders up and prices down). The print was below the pre-crisis seasonal (+2bps) due to smoothing of the historical seasonal.
  • Asia: BI (Indonesia), Bank Negara Malaysia, MAS and BoK continue to intervene to curb domestic currency devaluation, afraid of importing inflation. Market anticipates BI is to announce new regulations requiring repatriation of FX from exporters.
  • INR: PMI fell in September to 50.4 (lowest in two-years), down from 52.6 in August.
  • KRW: Exports grew +19.6%, y/y, in September, slower than the +25.9% growth in August, but still stronger than the consensus forecast for 16.6%.
  • AUD: RBA kept rates on hold at +4.75%. Current policy stance remains appropriate, but opened the door to rate cuts, stating “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”
  • AUD: FI market increased the pricing for rates cuts at the November 1 meeting by +18bps to +44bps.
  • AUD: Aussie building approvals surprised higher and rose +11.4%, m/m in August. The trade surplus widened to AUD$3.1b in August from AUD$1.8b in July.
  • KRW: Korea CPI inflation fell to +4.3%, y/y, in September from +5.3% in August. Core-inflation also dropped to +3.9%, y/y, from +4.0% giving the BoK room to keep the won weak and exports competitive.
  • CNY: Reuters reported that Chinese policy makers may ask Hong Kong, CB to set up CNH swap lines (HK’s “delivered” CNY), to maintain adequate liquidity.
  • KRW: BoK, FX reserves fell $8.8b in September. This suggests that a bulk of their intervention was done using forwards.
  • PHP: CPI inflation rose moderately to +4.8%, y/y this month from +4.7%, but below the consensus forecast of +4.9%. Inflation pressures are showing signs of easing and this would allow the BSP to keep the volatility of the PHP low.
  • THB: BoT Governor said that the central bank may switch its inflation target to headline inflation from core-inflation. The proposed target is +3% with a +/- 1.5% tolerance band. The current headline inflation is 4.0%.
  • SGD: MAS has announced that its semiannual policy statement will be released on 14 October.

September 30, 2011

Week In Review September 25-30

Filed under: OANDA News — Tags: , , , , , , , — admin @ 10:30 am

The week is ending with the pendulum swinging back in favor of risk reduction. The catalysts for the deterioration in risk is as difficult to specify as they were for the risk rally earlier in the week. Despite the toing and froing of austerity ideas and Greek sovereign debt solution suggestions, the market remains in a defined range as dealers execute month and quarter end-demand requirements. The manic price movements are similar to 2008 making the market fearful of a repeat performance.

Policy makers are doing everything possible to stay ahead of the curve. The Fed has implemented “Operation Twist”. Although they are not providing any new liquidity, their objective is to keep rates low. Ben and his crew still have the ammo to implement QE3 down the road if need be. Europe is in the process of ratifying the June and July amendments to the EFSF program. However, once achieved, their problems will not end there. The market anticipates a line up for a hand-out.

Next week we get a slew of data and Central Bank rate announcements (BoJ, RBA, ECB and BoE). It will be Trichet’s last chaired meeting. It’s anticipated that he will exit on a dovish footing. The market is eying the weekend release of China’s PMI to set next week’s tone.

Below are some of the highlights of the week:


EUROPE

  • G20 and IMF: Meetings brought no significant relief for European sovereign markets. Policymakers signaled that they will wait for the ratification of the EFSF’s enhancement before they start negotiations on specific plans to boost the capacity of the program or further write downs of Greek debt.
  • EU: Chief Executive Regling of the EFSF said that the facility may not be allowed to borrow from the ECB under the EU treaty, which forbids the ECB from financing governments directly.
  • FR: CB governor Noyer denied reports of plans to recapitalize five of its largest banks.
  • GER: Ifo survey fell less than expected, slipping to 107.5 from 108.7, better than the 106.5 consensus forecasted, but at the weakest levels in two-years. Future expectations eased to 98 from 100, better than the 97.3 consensus. The headline print points to a rapidly worsening outlook in line with the weak flash PMI’s. The decline is driven by manufacturing and construction.
  • GR: Parliament voted and passed a controversial property tax imposed by the austerity package negotiated with European officials.
  • EU: Slovenian parliament ratifies the latest amendments to the EFSF agreements.
  • EU: It’s reported that the ECB may discuss rate cuts, new 12-month LTRO’s, and restarting purchases of covered bonds at next week’s meeting (6 October).
  • EU: CNBC reported that EU is discussing plans to leverage up the EFSF through a special purpose vehicle (SPV). It would issue bonds. The proceeds would be used to purchase peripheral European, Spanish and Italian debt, as opposed to the EFSF borrowing directly from the ECB. It would help to stabilize euro area credit and risk sentiment in general.
  • UK: CBI reported sales fell to -15 this month from -14 previously. Continued weakness in the economy could prompt the BoE MPC to embark on new QE next month.
  • EU: Finland’s parliament approves EFSF amendments.
  • Financial Times: Reported that EU Policy makers are split over the terms of Greece’s second bailout, with about 7 members arguing for greater private sector write-downs.
  • Reuters: Stated that the EIB had not been approached to take part in any bailout involving the EFSF and it has no intention of becoming involved in any such scheme.
  • ITL: Business confidence deteriorated more than expected this month to 94.5 from 98.6. Weak growth is expected to keep fiscal consolidation plans under pressure.
  • SE: Consumer confidence fell -10 points this month to -5.8, the lowest level in 21-months. One year expectations also weakened considerably.
  • NOR: Their Financial Supervisory Authority recommended lowering the loan-to-value ratio from 90% to 85% of the property’s market value. Objective is to reduce household debt burden.
  • EC: Refuted reports that the Euro area nations are pushing for Greek bondholders to accept larger write downs.
  • GER: Germany passes EFSF legislation with large majority (523 vs. 85). Merkel’s political position strengthens.
  • ITL: Italy successfully auctioned €9b in bonds (3 to 11-yr). Their continued ability to place paper in the market is critical to avoiding a severe worsening in the systemic environment.
  • EU: Euro-zone confidence fell more than expected in September with consumer, industry and services sentiment all deteriorating and supports the recent soft PMI’s prints. It raises more concerns about the impact of recent financial market turmoil.
  • SE: Swedish retail sales fell -0.3%, m/m, in August. Market expected a flat reading and consistent with the sharp drop in consumer confidence. Dealers are pricing the Riksbank to keep rates on hold.
  • NOK: Norwegian retails sales surprised strong, rising +1.3%, m/m vs. +0.7%. Annual retails sales growth improved to +7.6%, y/y, from -1.2%.
  • UK: Data on gilt holdings show that foreign investors sold £0.75b in August (first time since March). It would suggest that market expects the resumption of asset purchasing in the UK and look forward to a BoE announcement next week.
  • UK: Net consumer credit and mortgage approvals gained last month, but remain weak.
  • CHF: Swiss Sept KoF Leading Indicator 1.21 vs 1.61 pvs, 1.35 exp.
  • GER: Bundestag not willing to leverage EFSF – EconMin Roesler
  • Ger: German August Retail Sales -2.9% m/m, lowest since May 2007
  • EUR: Euro-Zone August Unemployment unchanged at +10.0%, as expected.

Americas

  • US: “New”-Home Sales release fell for a fourth consecutive month (-2.35% to +295K). It recorded the biggest drop in prices in two years with median prices declining -7.7%, y/y, to +$209k.
  • US: Home prices rose in July, driven by seasonal demand. This was the fourth consecutive monthly increase registered by the S&P’s Case-Shiller index (+0.9%, m/m).
  • US: CB’s consumer confidence again provided a print on the soft side this month (45.4), extending the prior months plummeting number, but did beat market expectations (46). Consumers continue to worry about future income.
  • CAD: BoC Senior Deputy Governor Macklem said policy interest rates “can be reasonably expected to remain below normal for some time to come”.
  • US: Durable good orders decreased by -0.1% from the prior month to $201.7b. The market had been expecting a +0.2% rise in orders. The drop followed a +4.1% total orders jump in July and are up a stellar +10% from a year ago.
  • US: Weekly initial claims fell -37k from the previous week, to +391k. Claim’s moving average remains elevated at +417k.
  • US: Flash GDP print showed that growth was revised to +1.3% from a previous +1% print.
  • US: NAR seasonally adjusted index for pending sales of existing homes decreased -1.2% to 88.6.
  • US: Michigan consumer index rises (60.4 vs. 55.8) in September from the lowest level since November 2008 as pessimism about the economy eased.
  • CAD: CAD Economy grew GDP +0.3%, m/m, in July, +2.3% y/y.

ASIA

  • CNY: China seems to have ruled out buying debt of troubled European countries, but could be interested if Europe issues euro bonds.
  • CNY: During the IMF meetings, PBoC governor Zhou stated that China would not halt the rise of the CNY as it did during the 2008 crisis, when it had feared that a stronger CNY would further cut into exports. It suggests that they will continue the normalization of the currency’s value.
  • SGD: Industrial output surged +21.7%, y/y in August, much greater than the +11.2% expected increase and led by a +157%, y/y jump in Pharmaceuticals.
  • PHP: The trade deficit rose to +USD750m in July from +USD376m and pushed the 12-month rolling deficit to +$6.7b (3% of GDP). BSP monetary policy has turned neutral and FX policy increasingly cautious.
  • Asia: Central Banks continue to intervene to smooth Asian currency crosses.
  • KRW: The manufacturing business survey was flat at 86 for October while the non-manufacturing survey bounced up slightly to 86 from 83 in September. Market expects the BoK rate policy to remain on hold.
  • KRW: Korea’s current account surplus fell to a seven-month low of +$401m in August from a downwardly revised +$3.8b. Export numbers are being blamed. BoK will not like KRW appreciation.
  • TW: Taiwan’s central bank (CBC) kept policy rates unchanged at +1.875% as widely expected. Usual concerns over Europe and US cited as the reason.
  • NZD: Fitch and S&P’s downgrades New Zealand to AA and outlook stable.
  • CNY: HSBC China PMI was unchanged at 49.9 in September, better than the flash estimate of 49.4.
  • JPY: Japan monthly data confirmed the authorities did not intervene in the FX market. Finance Minister Azumi said they will stay vigilant on speculation activity in the yen and would not rule out any countermeasures. BoJ is expected to ease policy next week.
  • KRW: Korea’s IP rose less than expected +4.8%, y/y in August vs. +6.1%. Look for the BoK to want to keep the won soft.

September 9, 2011

Week in Review September 4-9

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:30 am

All policy makers have been reading from the same dovish script this week. The general message from central banks is to turn more ‘cautious and neutral’ given the rapid slowing and stagnation evident in key macro indicators. That was the easy part for investors to contend with. The week is ending on a sour note with the market, ahead of the G7, is spooked by default provisioning talk. There is suggestion that the German government is said to be preparing plans to shield its banks in the case that the Greek’s default (denied obviously) has investors grabbing ‘safer-haven’ assets.

Below are some of the highlights of the busy week:


EUROPE

  • SNB sets a floor for EURCHF at 1.20 and will “no longer tolerate” a EURCHF exchange rate below 1.20. The statement indicated that policy makers are prepared to buy foreign currency in unlimited quantities and noted that even at a rate of 1.20, the CHF is still high and should continue to weaken over time.
  • News flow remains generally negative for the EUR. German orders fell -2.8%, m/m- showing further signs of the economy slowing, putting pressure on the peripheries as their fiscal consolidation ability becomes more constrained.
  • The Greek Finance Minister promised a faster implementation of the privatization program and structural reforms-trying to repair relations with Troika.
  • Italian government expects austerity measures will be broadened to include VAT increases and a tax on higher earners, helping keep on track their promised targets despite cyclical slowing.
  • The Germany Constitutional Court rejected challenges to the rescue packages for Greece and other peripheral borrowers and did not introduce any hurdles for the approval of EFSF enhancements. The court also ruled that future aid and guarantees would need to be approved by the budget committee of the lower house.
  • German industrial production rose +4%, m/m, in July. It was broad based and above expectations of a modest +0.5% gain. Note: the data contrasts the deteriorations in manufacturing PMI and Ifo of late.
  • UK, industrial production fell -0.2%, m/m, in July, signaling a weak start to 3rd Q GDP.
  • Norway’s IP contracted for the second consecutive month by -1.5%. Norges Bank Governor Olsen commented on currency strength stating that ‘a krone that is too strong can over time result in inflation that is too low and growth that is too weak’.
  • Chicago Fed President Charles Evans (a voter) commented that the Fed should consider adding a very significant amount of policy accommodation and ignore the 2% ceiling on inflation.
  • BoE and ECB as expected kept rates on hold at +0.5% and +1.5% respectively.
  • Trichet:Euro-zone’s economy will grow more slowly than previously expected and stated that the region faces ‘intensified downside risks’. Monetary policy is still ‘accommodative’,
  • MPC also left its asset purchase facility on hold at +200b.
  • President Obama announces bigger-than-expected $447b stimulus plan
  • Greece pushes Private Sector involvement (PSI) announcement back through end of September.
  • Industrial production in France and Sweden beat expectations in July, rising+1.5% and +2.8%, m/m, respectively. This is on the back of a rebound in auto production post-Japanese supply disruptions.
  • Jeurgen Stark resigns from the executive board of the ECB-rumors of being a reluctant advocate of the “Securities Markets Program” (SMP).
  • G7 finance ministers meet for two-day summit

Americas

  • US ISM non-manufacturing PMI defied expectations and strengthened last month (53.3 vs. 52.7). The underlying respondents comments were ‘mixed’.
  • Fed’s Beige Book said the economy grew at a slower pace in some regions of the country as consumers limited their spending and factories curbed production.
  • BoC, as expected, kept rates on hold at +1%. The expected ‘dovish’ tone was applied with Governor Carney sticking to his script laid out in August.
  • US labor data continues to offer up further signs of weakness with jobless claims rising last week by +2k to a seasonally adjusted +414k.
  • US Trade deficit in July reported its biggest drop in nearly three years (-$44.8b vs. -$51.5b, down-13%) as exports surged to a record high and retreating oil prices cut into imports.
  • OECD expects the Canadian economy will avoid slipping into another recession and recover from the second quarter contraction to lead expansion among G7 in the fourth quarter.
  • Canada lost -5.5k jobs in August, full time +25.7k, part time -31.2k and the unemployment rate edged up to +7.3%.
  • President Obama announces bigger-than-expected $447b stimulus plan.

ASIA

  • AUD jobs adverts were a weak -0.6%, m/m, in August which follows the soft -0.7% print in July and suggests another weak employment reading for August.
  • HSBC services PMI fell sharply to 50.6 in August from 53.5 in July. This is the lowest print this year and suggests that the credit tightening measures that Chinese policy makers have imposed are starting to slow the service sector as well.
  • As expected, the RBA kept rates on hold at +4.75%. Market pricing for rate cuts over the next 12-months is unchanged and around +129bp. Policy makers removed the comment that it is appropriate for monetary policy to ‘exert a degree of restraint’. Remains concerned about the medium-term outlook for inflation, but, expect softer global and domestic growth to contain inflation.
  • AUD current account deficit narrowed to $-7.4b in 2nd Q with net exports surprising to the downside.
  • AUD Housing finance numbers were up +1% in August boosted by an increase in investment lending of +1.9%.
  • BoJ left policy unchanged and no changes to its asset purchase program. With the SNB capping its currency expect the JPY to benefit. BoJ continues its wait and see approach.
  • AUD GDP rose a stronger than expected +1.2%, q/q, in 2nd Q , driven by robust consumer spending and strong exports. Governor Stevens reiterated that policy rates are likely on hold and did not point to policy easing anytime soon.
  • Asian central banks BMN, BoK, BI and BSP keep rates on hold
  • AUD Employment fell -9.7k last month, far below the consensus forecast for a +10k gain. The decline was due in part to a -12.6k fall in full-time employment, while part-time employment rose +2.9k. This has now pushed the 12-month rolling jobs created figure to +140k from the peak of +400k one year-ago.
  • Reports from EU Chamber of Commerce in China President stating that the CNY will be fully convertible by 2015

September 7, 2011

Eurozone Engine Stalls; German Court Rules Bailouts Legal

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 1:48 pm

Yesterday’s announcement that factory orders in Germany plunged 2.8 percent in July sent shockwaves through the Eurozone. The poor showing had investors scrambling on fears that Germany may no longer be in a position to serve as the “engine” to power the region’s recovery.

By the end of the trading day the euro had declined by more than one percent to close below the $1.40 mark for the first time since the middle of June. European stock markets were in decline as well with the DAX paring a full percent in value on Tuesday while the CAC 40 and STOXX 50 both lost 1.13 percent and 1.28 percent respectively.

Eurostat, the European Union’s statistical office, noted that Eurozone growth fell largely because of the “poor performances” of the region’s two largest economies, France and Germany. According to Eurostat, France recorded no growth in the quarter while Germany could only manage a very disappointing 0.1 percent improvement.

Eurozone Engine Has Stalled

The weakened state of the economy has not been lost on businesses or consumers. For the month of August, German business confidence fell to a four-month low while the consumer confidence index is set to retreat to the lowest level in a year; worse still, there is a greater sense that the weak results for the quarter are merely the start of a longer trend.

The total of the rescue packages provided so far amounts to about 300 billion euros (US$422.1 B) of which Germany – as the region’s largest economy –has provided roughly 25 percent. This has caused a backlash at home for Chancellor Angela Merkel and it is only through great effort that the Chancellor has managed to garner sufficient support to keep the coalition government onside with her efforts to prevent a Eurozone member default.

This task has likely become more difficult in the wake of today’s ruling on the legality of participating in the provision of the emergency bailout packages.

German Court Rules Bailouts Are Legal

Earlier this year, a handful of disgruntled German politicians opposing the use of taxpayer money to bailout other sovereign nations turned to the courts for a ruling on the legality of the bailout deals. At the heart of this legal challenge was the European Union’s “no bailout” clause intended to force all member countries to abide by the deficit and total debt limitations required for acceptance into the Eurozone membership.

The ruling was delivered earlier today and while the actions were found to be legal, the court did add new conditions to future payments. Chief amongst these new rules is the requirement that will force Merkel to gain approval from the German parliament’s budget committee before Germany can contribute to the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) planned for 2014.

While this ruling does clear the way for Germany to continue to act as the leading sponsor for the EFSF, it does raise the possibility that the budget committee may deny Merkel permission to contribute to the bailout funds. Should this happen, there is a strong likelihood that both funds will fall far short of their targets leaving insufficient funds to prevent a Eurozone member default.

August 25, 2011

Sterling Falls as UK Consumer Confidence Weakens

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 2:34 pm

The British pound fell against the major currencies today following an update indicating that consumer confidence is on the decline in the UK. For August, the consumer sentiment index administered by the Nationwide Building Society lost 2 points, falling to a reading of 49 for the month. This matches the lowest result since April. The forward looking index suggests the index could fall another 3 points in the next few months.

The news put a halt to recent gains for the pound. Against the euro, sterling dropped to a two-week low of 0.8690, while against the dollar, sterling declined 0.6 percent to $1.6280 in late-day trading in London.

Consumers continued to suffer through higher prices in July with the Consumer Price Index climbing an annualized 4.4 percent after jumping 4.2 percent in June. A steep increase in energy costs along with an increase in the Value-Added Tax (VAT) from 17.5 percent to 20 percent contributed to the hike in prices.

Despite the increase in CPI, the recovery appears to have stalled. Unemployment remains elevated with 2.5 million people currently out of work. Youth unemployment is particularly troubling with more than 20 percent of workers under the age of 25 looking for placements. A recent survey of businesses suggests that the employment outlook will continue to deteriorate for the remainder of the year with the unemployment rate projected to reach 9 percent by the time 2011 draws to a close.

The weaker consumer sentiment and worsening employment picture may provide the Bank of England with sufficient reasons to hold off on an interest rate hike. Governor Mervyn King has argued for several months now that even though the Consumer Price Index is well above the 2 percent target rate for growth, raising interest rates is not in the best interests of the country. According to King, the anemic pace of growth could very well turn negative should borrowing costs rise providing further inducement for consumers to hold off on the purchase of big ticket items.

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