Forex Market Outlook 10/17/11
Over the weekend, G-20 leaders re-iterated their desire that EU leaders pick up the pace and come up with the solution to the Euro debt crisis, essentially giving them a week to finalize the plan. This provided the market with some optimism to start out the day, but that optimism was short-lived as Merkel's reps sought to lower expectations.
The message was that essentially the "dream" of solving the crisis in the next week was not likely, essentially dousing risk appetite lower. While European leaders believe that they have identified 5 areas that need to be addressed, as always, the devil is in the details.
One of the biggest points of contention is what level of losses will private investors voluntarily accept and whether or not those losses would trigger contagion to the other areas of the Euro zone. The previously agreed upon 21% loss is seen by leaders to be insufficient, so obviously banks are balking at higher figures. If banks are forced to take a larger "haircut", then logically it makes sense that they will likely need to retain more capital.
News on the docket this week will be highlighted by inflation figures in the US, UK, and EU as well as the release of the minutes from the rate policy meetings at the BOE and RBA respectively. While inflation is seemingly not a problem at this point, it could increase significantly if the cloud of worry is removed from the markets on the potential Euro debt deal.
Tomorrow will bring economic data from China which could have a major affect on both the Aussie and Kiwi. GDP figures will show China's growth rate and any perceived slowdown could be compounded if the currency manipulation bill here in the US gets more traction. Right now it appears to be DOA, but it's sometimes hard to gauge what self-serving politicians might do. Regardless of whether the bill passes, the conversation has been turned up with the volume getting louder from both sides.
There is also going to be a bit of Fedspeak this week with the theme likely directed toward the Euro zone and their troubles. Markets here look poised to rally if EU leaders can come up with a decent plan. US corporate earnings have been acceptable so far given the overall economic environment, but so much more needs to be done.
If the risk trade can return in any meaningful way, then we could see higher prices across the board for both stocks and commodities. This is where it gets interesting though, as I could envision a scenario where stocks trade higher but commodities trade lower on overall reduced global growth. How this will all play out is anyone's guess but I think the markets will react more forcefully to good economic data and less to negative data.
The Pound is likely to see some gains if money flows continue to move from Europe to other areas around Europe (including the Swissie) and tomorrow's CPI report could put the BOE in an awkward position if inflation continues to rise after they increased the size of their QE program by 75 billion. The minutes released from the rate policy meeting could show what they might do next.
Other than that, it's really just about risk this week emanating from the Euro zone and whether or not the market believes a solution may be forthcoming. Of course this is all predicated on the belief that there is a solution possible that would not kill the markets and cause further contagion.
This might be the problem that haunts EU leaders and the markets should be careful what they wish for!
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