Forex Market Outlook 11/21/11
Markets are selling off this morning as the realization that the debt "super-committee" was nothing more than a "super-sham" intended to set the stage for the unbearably ugly political battle we are about to see unfold over the course of the next year. While the most optimistic of us had high hopes that they might be able to rise to the occasion and come up with solutions, the most pessimistic are saying, "told you so" this morning.
However all is not lost now that the abject failure of this doomed idea has materialized, as there will be automatic deficit reductions of $1.2 trillion. The problem is that it these automatic cuts will not be made responsibly as it will hurt those who can afford it the least and will weaken our national defense in the process. Thanks a lot.
Apparently Spain is a more reasonable place and they have elected a new conservative government who immediately are getting a baptism of fire but are saying all of the right things to start. It is obvious that major reforms are needed in Spain and they appear committed to deficit reduction but this may be a losing proposition if the ECB does not do something about the rising yields in the region.
This is setting up an inter-Euro battle as the markets are calling for a TARP-like solution where the ECB becomes a buyer of last resort and keeps the bond vigilantes from driving yields higher. As borrowing costs go up it makes it harder for countries to service debt whether they undertake massive austerity or not. Both Germany and the ECB itself are dead-set against this type of solution which may be the only way the Euro in its current form can survive.
Meanwhile there is some economic data due out this week and most if it is shoved forward to the next two days as the US markets are closed on Thursday for the Thanksgiving holiday. The economic data is weakening around the globe and now China is getting into the act saying that we are facing a prolonged global recession ahead.
To give a quick run-down of what's happened earlier today and then what to expect later this week will probably be the most effective way to highlight this week's action. The big news from earlier this morning was that Japanese exports came in lower than expected and UK home prices fell more than expected. These figures fall in line with the stalling global growth story so it will be important to see how Central banks respond.
The release of the BOE rate policy meeting will be out on Wednesday so we will see how committed they are to further monetary easing even after they increased their asset purchase program at the last meeting despite CPI readings in the 5% range. The Bank of Japan could also be close to intervening again in its currency as recent strength has it back to levels close to highs from which earlier interventions were enacted.
Existing home sales in the US are due out later this morning and expected to have declined, and there are a bunch of ECB leaders speaking today as well.
Tomorrow will bring the release of the FOMC meeting minutes, as well as US personal consumption figures and US GDP estimates. Canadian retail sales figures and EU consumer confidence round out the day.
Wednesday is packed with the aforementioned Central bank minutes releases, as well as Euro zone PMI and industrial orders figures. US data releases include: durable goods orders, personal income and spending, initial jobless claims, and U Michigan consumer confidence figures. Essentially these figures that are usually spread out along the week have been moved up for the holiday.
On Thursday, German GDP figures highlight the docket, with very little to be released on Friday.
Frankly I am a little surprised at the market reaction to the "super-failure" (as I am calling it) as I can't believe that anyone thought this would work in the first place. The concern is that the ratings agencies will downgrade the US yet again but we saw what happened the last time we got a downgrade--that yields in the US went LOWER as a result as the flight to safety trade kicked in.
I suppose the EU dragging its feet could also be an issue but the landslide election in Spain gives me hope that they people of Europe are starting to come around to the reality that things need to change. Once they accept it and move on, they may be able to recover.
In other words, just another week in the forex market!
