Forex Market Outlook 12/15/11
The markets rebounded yesterday from early losses after the European session closed yet still closed lower as a reminder of the risk in the marketplace. As European nations scramble to get their budgets under control, there is a essentially a “race against time” taking place as credit downgrades are looming and bond vigilantes are selling causing rates to rise. The longer it takes to restore market confidence (if that is even possible at this point), the worse it is going to become.
But Germany continues to balk at the idea of Euro bonds or any solution that requires more of them. Yet they continue to thrive despite the overall economic malaise Europe is facing, as evidenced by this morning’s better than expected PMI figures, with manufacturing coming in at 48.1 vs. an expected 47.5 and services coming in at 52.7 vs. an expected 50.
Meanwhile there are daily rumors about banks needing bailouts, countries on the rink of default, and governments struggling to meet fiscal objectives. As the Euro declines, it is only going to get better for German manufacturing, perhaps at the expense of the indebted nations. Also reported this morning was in-line CPI data, though as I mentioned earlier the ECB is less concerned with inflation at this point as Draghi has been loosening monetary policy.
Speaking of monetary policy, the SNB left Swiss rates steady at 0% and did not take the opportunity to move the target exchange of the franc higher vs. Euro. They are taking a decidedly “wait and see” approach despite the deflation they are seeing and lower than expected industrial production figures, which decline 1.4% vs. an expected .9% decline. The SNB is trying to maintain currency weakness with verbal actions and not concrete ones so they may be tested again if the Euro debt crisis worsens.
In the UK retail sales figures were a mixed bag as monthly retail sales figures came in lower than expected at a decline of .7% vs. a decline of .4%, yet the YoY number came in higher than expected at .5% vs. an expected .3%. The 1-year inflation expectation came in slightly lower than expected at 4.1% vs. 4.2% though this is still way outside of the BOE target of 2% and the narrative is that government austerity will cause prices to fall despite the easy money policies of the BOE.
In Japan, the Tankan manufacturing survey came in near 2009 lows as the fear of global recession has turned the Japanese outlook negative. This caused Japanese stocks to trade lower, providing an inverse correlative effect of strengthening the Yen. Yet Chinese PMI figures came in better than expected, giving a lift to both the Aussie and the Kiwi.
So the markets have rebounded heading into the US open as economic data hitting the tape all appears to be positive. Initial jobless claims figures came in at 366K which is the best number I can remember in some time. PPI data came in slightly higher than expected at .3% vs. an expected .2% though this is still fairly low in the grand scheme of things. The Empire manufacturing reading came in nearly 3x better than expected posting a 9.6 vs. an expected reading of 3. Later this morning industrial production figures and the Philly Fed reading will round out the news.
So the data is mostly positive and US stock futures have risen as a result, with the Dollar weakening vs. all others. What has been interesting of late is the price of gold, which is now trading at a 5-month low under $1600. This may be indicative of the market view that deflation may be a bigger problem going forward then anyone is expecting.
While this may be true to a certain extent, my belief is that CPI data is flawed and favors the banks over the individual. What I mean by that is that what we actually have is “biflation”, a condition whereby you have rising prices for things that are necessities like food and energy, and asset price deflation where prices for things like houses decline. The overall aggregate of these number cancels one another out and shows low inflation or possibly deflationary figures, yet people struggle to get by as stuff just costs more.
I don’t need a government report to tell me what my monthly food and energy bills are and my own eyes tell me those costs are higher. Yet the Fed isn’t about to budge on interest rates because the alternative is more disastrous without the ability for politicians here to solve problems.
The US economy is performing well despite all of the domestic and international headwinds keeping risk levels at elevated levels, but we could do so much better if governments can get their fiscal houses in order.
Remember, the forex market is a relational market so you are attempting to buy the currencies of those that are performing well by selling the currency of those that aren’t. That is what makes this market the most intriguing and important market in the world, as it gives you global exposure to the best growth stories and allows you to invest in governments that are functioning and have the best policies.