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Forex News Top Stories Forex Market Outlook 11/18/11

World markets started out this morning in a very good mood as there is a new hope and belief that the Euro debt crisis is moving closer toward a resolution.  Lots of chatter from EU leaders has the market in an upbeat mode.  But has anything changed?  Not really.

And perhaps I am indicative of the American skeptic as others have caught on and are using this opportunity to “sell the rip” as I talked about on Wednesday.  So we are pulling back a bit from earlier highs on what has turned out to be the best morning we have seen in some time.

So far this morning bond yields in the troubled Euro zone countries are moving lower as the ECB has been buying debt to stem the massive selling that has taken place.  While this is not an official policy just yet with an agreed upon size and scope, they have done enough to stem the rise of yields.  ECB honcho Draghi is calling on the EU leaders to speed up the process of the EFSF and the market has become hopeful as a result.  In addition, the World Bank head said that the US and China would help support the region via the IMF once the Euro zone plan is in place and implemented.

There are also some good signs that the newly elected governments in Greece and Italy have the support necessary to enact the austerity that is needed to stabilize their economies and receive funding to help reduce deficits.  This is key to the whole rescue package working and the survival of the Euro, for without the ability to cut spending, no relief would be forthcoming.    

This morning is largely devoid of global economic data with the exception of PPI figures from Germany that came in slightly higher than expected, showing a monthly gain of .2% vs. the expected .1%.  The YoY figure at 5.3% was as expected.

In Canada, however, CPI data came in higher than expected prompting a rise in the Loonie (see chart of the day).  Core inflation in Canada came in at 2.1% vs. the expected 1.9% and the headline figure came in at 2.9% vs. 2.8%.  It must be noted though that both of these figures are still lower than last month’s readings so there may not be a push for any type of BOC rate change at this point.

But my feeling is that the only thing keeping us from a high-inflation environment right now is the Euro debt crisis and if that becomes “solved”, then we could see extremely high inflation, which unfortunately is exactly what Central bankers (especially our Fed) want to see.

Just yesterday Fed governor Dudley was speaking and said that the Fed could and would do more easing if need be.  This fear that further easing and Dollar depreciation could drive prices (particularly commodities) higher may force economic activity on the back of the consumer.

With oil prices just shy of $100 and the Fed potentially easing further, not to mention the demand need for heating oil as we approach winter, could drive inflation a lot higher.  Though it likely won’t show up on the radar as housing will continue to decline with people spending more money on food and fuel giving them less to spend on housing and discretionary items. 

This is dangerous in a period of high unemployment as in my opinion higher prices do not drive economic activity but rather stifle it.  All this serves to do is “tax” the consumer and helps the government inflate their debt away.  The only way this encourages activity is if people have the real belief that they need to buy now for fear of higher prices later.  But the US consumer is tapped out and has come to the realization that they may have to do without.  Reduced bank lending has prevented the consumer from buying discretionary items (things they don’t need) and no one can use their house as an ATM any longer—if they still have a house!

With the debt Super-committee already poised to fail by all accounts so far, it is not so far-fetched to see why the Euro has held its value vs. USD.  At this point I an almost thankful for the Euro debt crisis, as the alternative may be a lot worse!