Forex Market Outlook 10/24/11
It is often said that the waiting is the hardest part, and that is exactly where we are in the global market dynamic with the Euro debt crisis continuing to linger. This past weekend's Summit has come and gone without producing anything more than the continued conjecture that has been plaguing the markets. Supposedly this Wednesday will be the day that produces the final resolution, though I am skeptical that this will be the end.
There are short, medium, and long-term issues that need to be worked out and to think that this will all be solved by Wednesday is silly at this point. This is after all, the 13th emergency summit in the last two months! The immediate problem is Greece and their sovereign debt issues and so far the answer seems to be asking private bondholders to take up to 60% losses on their holdings and not calling it a default. This then causes the intermediate term problem of bank losses and now requires re-capitalization. The EFSF right now remains at 440 Billion euros and is seemingly far too small to handle all of the potential problems. There has been no credible talk of how to increase that fund.
Finally, this brings us to the long-term issues of how to stop the contagion of this crisis spreading to the other debt-ridden countries, most notably Spain and Italy. The moral hazard created by potentially retiring Greek debt without a re-structuring opens the door for other nations to seek the same terms. Meanwhile, credit ratings will continue to fall (now France is looking at a downgrade) which will in turn increase the cost to service debt. The ECB has not gone to the printing press just yet, as its mandate of maintaining low inflation is still tantamount and German remembrance of the Weimar Republic and its hyperinflation is something they never want the chance to repeat.
So Wednesday will be the day of reckoning, and so far the markets have been moving to the upside despite the risk that still persists. Perhaps the market just wants to hear that there is a plan, regardless of the details. My feeling though is that Wednesday will disappoint and that the markets have been in "buy the rumor" mode so we may see "sell the news" on Wednesday. Stay tuned.
In addition, PMI figures in Europe came in worse than expected across the board showing signs of an economic slowdown, though New Orders figures were higher. This reversed some risk appetite the market had been experiencing in the Asian session, as Chinese PMI figures showed the fastest manufacturing growth in nearly 4 months which was also better than expected. Japanese exports also improved and came in better than expected.
This week is also marked by interest rate decisions in Canada, New Zealand, and Japan. While none are expected to change policy, the Japan rate decision could get interesting as the Yen has been strengthening vs. US and is now at the 76 level which many believe may be the level where the BOJ will intervene. While they most likely won't act before Wednesday's Euro debt summit, the rate decision the following day could produce fireworks if the deem the global situation to be stable.
Meanwhile, US stock earnings continue to come in better than expected and it seems as though markets want to go higher if this pesky Euro debt crisis would just go away. My guess is that even though markets have been moving higher, Wednesday's announcement may prove disappointing which could cause some short-term selling which in my opinion may be a long-term buying opportunity.
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