Forex Market Outlook 11/10/11
There is a small sense of relief in the markets today after yesterday's sell-off due to bond yields rising in Italy to above 7%. Italy was able to get off their bond auction which shows that they still have the ability to fund themselves, though higher yields will make it much harder for them to service their debt which could eventually lead to them having to tap the EFSF.
However, the EFSF is not big enough to bailout Italy should that become necessary so they need to move quickly to attempt to start reigning in deficits through austerity measures in order to set the economy on the path to fiscal health. One of the issues yesterday was that there was some fear that Berlusconi would somehow manage to survive and be able to drag out and remain in power though now this is looking highly unlikely and the word is that he will be out by next week. This begs the question of who will take over and at this point it appears as though Monti is emerging as the potential successor.
The situation in Italy has masked the situation in Greece as political infighting there dragged out the process of who would succeed Papandreou for four days. However this morning we have the answer, as Papademos has been tabbed. It should be noted that he has a tremendous business and banking background having been with the ECB previously.
So there is definitely a push to have more business and banking experienced politicians coming into power to help navigate the Euro situation and the bailouts and debt crisis.
This morning there is a lot more economic data then yesterday, and in the Euro zone it wasn't particularly bad or good. German CPI data came in slightly higher than expected, and French industrial production figures were lower than expected. In addition, the ECB released its economic forecast for the region and they lowered forecasts to reflect the slowing economy as a result of the debt crisis.
In the UK, the BOE left interest rates and its asset purchase program unchanged, at .5% and 275 billion respectively. While they were not expected to move after last month's increase in the asset purchase program, they will likely take a "wait and see" approach and watch what is happening in Europe. Their next move though is likely to be on the side of easing if the economy continues to flounder.
In Australia, 10K jobs were added as expected, but the unemployment rate remained steady at 5.2% even though there was an expectation of a tick higher. This could be the result of much higher than expected Chinese import figures, which grew by 28.7% vs. an expected 22% which helped push the Chinese trade surplus lower than expectations. Reduced exports were also an issue. Also to note is that Japan and New Zealand's consumer confidence figures came in lower than expected which is not surprising given the state of the Euro zone.
And speaking of unemployment, initial jobless claims here in the US came in better than expected showing that only 390K lost jobs last week vs. the usual 400K we have been seeing. This is a step in the right direction and I hope this trend continues but at this point it is woefully short of what's needed.
In Switzerland, calls to weaken the franc further are not being heeded by the SNB as businesses are concerned about declining exports and want the floor on the franc raised from 1.20 vs. Euro. This is unlikely to occur with pressure on the Euro due to the debt crisis and risk in the markets.
But this morning, risk appetite has returned for now as global stocks and commodities are largely higher, though the risk in the Euro zone still remains. While no on expects Italy to solve their problems overnight, getting a new government in place would be a good start. With new leaders focused on debt reduction and managing the economies, there may be hope that the market will ease up on the rates demanded to buy their debt, thereby making it easier for them to service it.
At least that's the hope.
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