Forex Market Outlook 12/14/11
The Euro carnage continues as I showed in the chart of the day from Monday, as we are now under 1.30 vs. USD and possibly moving lower. While I was surprised by Friday’s market reaction (positive) to the EU Summit where they decided to further delay action, now the market is waking up to the harsh reality of the situation. Though perhaps there was some hope that the US Fed, and not EU leaders, would save the day through monetary policy at yesterday’s FOMC meeting.
However Bernanke did not budge yesterday despite the market sell-off that began before the meeting and then continued throughout the remainder of the day. His comments at the meeting were consistent with previous statements that have already placed the possibility of further easing on the table, but he did not take it a step further as some in the market may have been hoping.
There is a “see-saw” relationship between the US dollar and the Euro as the Euro is considered the “anti-Dollar”. This inverse relationship has been ruling the markets for some time and is partially responsible for the “risk trades” in the market. But I get a sense that those correlations are starting to break down as I mentioned yesterday. US stocks were largely higher for most of the day even as the Euro was tanking, though they caught up and finished lower by the end of the day.
Markets have followed through this morning to the downside this morning with stocks and commodities poised to start lower. US dollar strength has been fueling these declines, but again I am in the camp that thinks these relationships can break from one another.
Overnight in Europe, industrial production figures came in lower than expected, and an Italian bond auction pushed yields higher on 5-year notes to the highest levels in nearly 14 years in stark contrast to yesterday’s Spanish note auction. This is indicative of the headwinds that the Euro zone faces for failing to address the debt problems at the last meeting. Credit downgrades are looming.
On a brighter note in the UK, the employment report came in better than expected with jobless claims coming in lower than expected at 3K vs. 13.5K. The unemployment rate remained steady at 8.3%. This reflects the rising economic tide in the UK that appears to be improving the overall health of the economy. Next week’s release of the BOE rate policy meeting minutes will shed light on whether or not they are in favor of further monetary easing. The Pound has risen vs. the Euro over the last three days as money flows make their way to the stronger economic situation.
One country that is still “strong” but experiencing some economic malaise is Switzerland where the SNB will give their rate decision tomorrow. The Swiss are starting to see some Japanese-style deflation as the franc has strengthened prompting some to believe that the SNB will try to weaken the franc vs. the Euro by lifting the target area from 1.20. With the current tumult in the Euro zone, they may hold steady for now.
Overnight in Australia, consumer confidence figures came in worse than expected, showing a reading of 94.7 vs. last month’s 103.4. This decline has helped impact the Aussie as it is now trading below parity vs. USD. Take a look at my chart of the day from yesterday for a technical perspective.
There is no real news due out here in the US for the rest of the day. Mortgage applications were up 4.1% but that was basically all people trying to re-finance and not new applications. There is some Fedspeak due out later this morning.
CPI data from the EU tomorrow and the US on Friday could be potential market movers but I think it unlikely that this will affect monetary policy in the near term.
While politicians and central bankers around the globe believe that time is on their side, I think they are mistaken. Markets “want” to go higher but are having a hard time because of all of the global economic uncertainty despite the fact that there are some decent economic stories taking place, particularly here in the US. Markets however are forward-looking so with little hope on the horizon, it may be tough sledding going into the end of the year.
Santa Clause may be staying home for Christmas, and investors might end up with coal in their portfolios!