Forex Market Outlook 12/19/11
The big news of the weekend is the death of N. Korea’s crazy leader Kim Jong Il, which has provided a minor bit of uncertainty in the Pac Rim as it is expected that his son will succeed him. The goes to show that uncertainty is sometimes worse from a market perspective than the removal of a bad situation. I would though have thought that markets would have rejoiced and rallied, but uncertainty rules.
However the markets have bounced back from early selling in Asia and look to open higher here in the US, with both stocks and commodities trading higher. There is still a lot of risk emanating from the Euro zone, and the potential for credit downgrades is looming.
In Spain, bad loans were up as the Spanish banking system attempts to withstand the fallout from the housing bust there and maintain stability despite unemployment that is over 20%, the highest in Europe. This comes after word form ECB chief Draghi maintained that the ECB would not step up their bond purchases, electing to adhere to the Central bank’s mandate rather than favoring practicality.
Later today, Euro leaders will conduct a conference call where they attempt to hammer out the details of the fiscal pact they agreed to at their last meeting. This unlikely to be the final word on the matter and Euro leaders have contributed to the economic demist they are seeing by dragging their feet and not responding to the crisis more swiftly.
Meanwhile they have been swift in asking others for money, particularly the IMF. EU leaders are calling for an additional $261 billion from the IMF and are asking the UK for $50 billion. Good luck with that. The Euro has been vacillating around the 1.30 level vs. USD, which is surprisingly strong given the state of affairs in Europe.
This is a holiday-shortened week so volume may decline as we approach the weekend. News this week from the EU includes German PPI and economic sentiment figures tomorrow, though there is not much else from a data perspective. This is not to say that there won’t be any news, but I will more likely be of an unexpected nature.
There is more news due out from the UK, including the release of the rate policy meeting minutes on Wednesday and GDP figures on Thursday. This could be supportive of the Pound if the BOE decides to take a wait and see approach or if GDP comes in better than expected. The data in the UK has been relatively strong in my opinion, though the markets are a discounting mechanism so surprises could happen to the upside.
In Japan, the rate policy meeting on Thursday is expected to produce no change as the Yen has virtually stopped trading vs. USD. There has not been a lot of volatility in this pair, which is just fine by the BOJ. But, there could be some Yen movement if problems emerge from N. Korea.
From the commodity currency bloc, the release of the RBA meeting minutes in Australia tomorrow, followed by Canadian CPI data on Wednesday and GDP figures on Friday, and rounded out by GDP figures in New Zealand could have an effect on the risk trade. Gold is sitting at $1600 with oil just above $94.
Lastly here in the US, the news releases are heavier toward the end of the week highlighted by the release of GDP figures on Thursday and some ancillary releases packed in. Markets are hoping to escape for the holidays with little fanfare and many are looking forward to putting this year behind us.
While the data here in the US has largely been positive, it is hard to buck the feelings of malaise that overhang the markets and the economy in general. There is absolutely no confidence that things are going to improve, and people are just waiting for the next shoe to drop. This is no way to run an economy as fear trumps sanity and then things don’t improve. Combine this with EU leaders essentially holding the world hostage through their non-actions, and we find the global economy floundering.
Will this continue into next year? Unfortunately, I think so.