Forex Market Outlook 12/06/11
Well it looks like S&P is at it again, reversing yesterday's promising start to the US trading session by putting 15 Euro zone countries on negative credit watch, including France and Germany based on the potential non-actions of the EU leaders summit at the end of the week. This is similar to the actions they took against the US with issuing the warning shot, though they did actually follow through with the downgrade based on Washington political ineptitude.
However this could be more problematic for the Euro zone as yields had been declining which would help them in debt service relief. This comes on the heels of the Merkozy announcement yesterday which is attempting to provide a stronger European fiscal union by requiring countries to have a balanced budget, then imposing sanctions against those who don't comply. They are also looking to speed up the establishment of the ESM, in addition to a change in the Basel rules over what type of assets banks can hold.
None of this is ground-breaking stuff and the S&P downgrade is essentially saying that they need to do more. Apparently they haven't been watching the scene unfold over there and the pace at which things get done. US Treasury Secretary Geithner is over there this week to try to force action. My sense is that this meeting like the others will be more of the same.
The data in the Euro zone did look promising though, as GDP figures came in as expected showing a gain of 1.4%. More importantly, German factory orders came in much better than expected posting a quarterly gain of 5.2% vs. an expected .9%. The ECB rate decision on Thursday is expected to reveal a 25bp reduction to 1%.
Contrary to my speculation yesterday (see chart of the day) the RBA reduced interest rates 25bp to 4.25% citing global recession concerns and the problems in the Euro zone. Australian GDP figures are due out tomorrow, followed by employment figures on Thursday.
Later this morning, the Bank of Canada will release its rate policy decision and are expected to remain steady at 1%.
In Switzerland, CPI data showed a decline in prices of .5%, the most in nearly 2 years and lower than the consensus estimate of a decline of .3%. This is worrisome for the SNB who have struggled to weaken the Swiss franc to help with exports so they are considering further action, including lower the target area vs. Euro from 1.20 to 1.30 or even going so far as to make interest rates negative. Should the problems in the Euro zone exacerbate, they may be fighting an uphill battle.
As a result, we are seeing some Japanese yen strength which has received some money flows from the other safe havens on risk aversion and unwind of carry trades from the Australian interest rate reduction.
Not much happening in the UK today, with home prices coming in lower than expected. The pound has been trading in a "middle ground" somewhere between the Euro risk appetite and the Swissie risk aversion. Industrial and manufacturing production figures will be out tomorrow, followed by the BOE rate decision on Thursday where no change is expected.
There is little news expected out of the US for the rest of the week so all eyes are on Europe. This morning's mild risk appetite has just flipped to risk aversion so we are seeing some early selling after some overnight gains. If we can make it through the first half of the US session without some Euro negativity, then we could see a late-day rally.
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