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Currencies AUD Trading Week Outlook: Dec. 5 – Dec. 9

Dec. 3, 2011 ( – With the European Central Bank interest rate announcement and the EU Summit on the horizon, the trading week ahead could prove crucial for the future fate of the euro and the debt crisis-stricken euro-area.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Mon., Dec. 5, 10:00 am, ET.

In light of the stronger-than-expected manufacturing index, the U.S. services industry activity is also forecast to expand for another month with an index reading of 54.0 in November from 52.9 in October.

2.    AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Dec. 5, 10:30 pm, ET.

The latest economic data from “down under” proved that the Australian “miracle economy” is not immune from the global slowdown, which coupled with easing inflationary pressures has raised the odds of another 25bps rate cut by the Reserve Bank of Australia to 4.25% from the current 4.50% level. A rate cut combined with risk aversion could become the formula for Australian dollar weakness.

3.    CHF- Swiss CPI- Consumer Price Index, the main measure of inflation preferred by the Swiss National Bank, Tues., Dec. 6, 3:15 am, ET.

Deflation has once again become a threat as the Swiss inflation gauge unexpectedly dropped below zero in October. With forecasts pointing to another decline at -0.3% y/y in November and the government “examining feasibility” on measures to deal with the strong currency, the Swiss National Bank might be forced into stepping up its efforts to weaken the franc. Although the next move by the central bank is still a bit of a “mystery”, the odds that we could witness a historic decision by the SNB to raise the EUR/CHF floor from 1.20 up to 1.25, or even to 1.30, are rising exponentially.

4.    EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Dec. 6, 5:00 am, ET.

The revised reading of the Q3 GDP is expected to confirm that the Euro-zone economy is losing steam, growing by only 0.2% q/q in the third quarter, same as the 0.2% q/q reading in the second quarter of 2011, and less than the 0.8% q/q increase in Q1 2011.

5.    CAD- Bank of Canada Interest Rate Announcement, Tues., Dec. 6, 9:00 am, ET.

Acknowledging that the global economy has “slowed markedly” with “significantly less favorable external environment affecting Canada”, the Bank of Canada is not expected to make any changes to its existing accommodative monetary policy and would be likely to keep the benchmark interest rate at the current 1.0% level.

6.    AUD- Australia GDP- Gross Domestic Product, the main measure of economic activity and growth, Tues., Dec. 6, 7:30 pm, ET.

Despite of the anticipated rate cut by the Reserve Bank of Australia, the Q3 GDP might lend some support to the Aussie with forecasts pointing to a stronger 2.3% y/y growth in the third quarter of 2011, compared with 1.4% y/y in Q2 2010. On the other hand, quarter-on-quarter growth is forecast to be unchanged at 1.2% q/q in Q3, same as the 1.2% q/q growth in the second quarter.

7.    NZD- Reserve Bank of New Zealand Interest Rate Announcement, Wed., Dec. 7, 3:00 pm, ET.

Becoming the most surprisingly hawkish of all major central banks, it would be interesting to find out if the Reserve Bank of New Zealand might change its position as a result of the global slowdown. The bank is expected to keep rates at the current 2.50% level for another month, but the Kiwi dollar could get a boost from any hints that the bank is still not steering away from a future rate hike.

8.    GBP- Bank of England Interest Rate Announcement, Thurs., Dec. 8, 7:00 am, ET.

With the largest U.K. trading partner, the Euro-zone, slowing and the EU debt crisis far from over, the odds are rising that the Bank of England’s policy makers could be prompted to increase the size of the Asset Purchase Program beyond the current 275 billon pounds; however, they might decide to wait until 2012 to do so. In the meantime, the likely outcome of the MPC meeting would be to keep the benchmark rate at its record low 0.5% level and to leave the door open to additional quantitative easing if conditions deteriorate. As a result, the GBP should continue to be confined in its current $1.50’s range, unless the EU debt crisis take a turn for the worst and massive risk aversion sends the sterling into the $1.40’s against the U.S. dollar.

9.    EUR- European Central Bank Interest Rate Announcement, Thurs., Dec. 8, 7:45 am, ET.

As many economists lower their Euro-zone growth forecasts and the ECB President warns about the potential for a “mild recession” on the horizon, it shouldn’t be a surprise to see the European Central Bank producing another 25bps rate cut at the upcoming meeting in an effort to avoid a double dip. Navigating through a sea of uncertainty, while at the same time trying to fend off political pressure to become the “lender of last resort”, the ECB might end up giving up the resistance and turning the printing presses on if the EU debt crisis escalates with borrowing costs rising to unsustainable levels. It is hard to see such scenario as a EUR positive…

10.    EUR- EU Summit of leaders of the 27 countries in the European Union, Fri., Dec. 9, all day event.

The outcomes of the EU summits in the last couple of years have a common thread- they all tend to remind us of Naked Eyes’ hit from 1983, as the markets around the world expect to see comprehensive solutions to contain the euro-area sovereign debt crisis but all they get are “promises, promises”. Will it be the same this time? Despite of the previous summit’s glimpse of hope that EU leaders have finally realized the seriousness of the situation after about 2 years since the beginning of the crisis, there are many murky details in the recently proposed strategies, some of them named “yesterday’s solutions” by Financial Times. The list of unanswered questions includes: how will EFSF be leveraged; can politicians effectively persuade the ECB to stand as a “lender of last resort”, or will that role be given to the IMF, or a newly-created European Monetary Fund; will EU members be willing to “sacrifice sovereignty in exchange for providing the economic and monetary union with a structural credibility”? Ahead of the last summit, “better late than never” optimism helped the euro register its biggest rally since March, 2009. Although another “hope rally” in the days leading to this summit would be sure to give the single currency a boost, the pressures on the euro could quickly mount if EU leaders fail to deliver the concrete and bold measures needed to win the debt crisis battle.