Forex Market Outlook 12/28/11
End of the year trade is in full effect and lower volumes than normal has not increased volatility very much as can sometimes happen. This has provided some low risk opportunities as prices have vacillated back and forth between the tight ranges.
There is not a lot of news in the global economy today, particularly from an economic data release perspective. In fact, most of the news expected for today’s US session has already been released with the exception of mortgage applications which are due out later this morning but unlikely to have a material effect on the markets.
One of the more interesting stories in the global markets is that the price of oil has been rising and is back over $100/barrel. This is due to some potential unrest coming out of Iran, who is using this opportunity to make some noise by threatening the international supply of oil. This situation is more bark than bite at the moment, but you never know how quickly these things can escalate. In any event, higher oil prices have been supportive of a stronger Canadian dollar. For those unaware, the Canadian dollar is positively correlated to the price of oil.
The economic data released today came from Japan and was basically negative across the board. Household spending, retail trade figures, and industrial production figures all came in lower than expected. CPI data also showed that deflation is going to continue, but the unemployment rate remained steady at 4.5%.
So the economic data in Japan is not good and much of the blame is going to be blamed on a stronger Yen. This has prompted Japan to seek bi-lateral deals for their currency reserves with the likes of China and India thereby effectively making funds available for trade. While this story hasn’t received a lot of press, it is important as it removes the US dollar as an intermediary and is a blow to the Dollar as the world’s reserve currency status. If more countries seek bilateral currency agreements then the use of the US dollar becomes less important. For all of the talk about currency manipulation, most of the world outside of the US believes that the US Fed is the biggest currency manipulator around the globe. It is no surprise that the US admonished Japan today for their direct currency interventions to stem Yen gains over the past year. This could be a story that plays out over the course of the 2012, so stay tuned and read between the lines of this one!
This caused Asian markets to sell off overnight and the Yen to strengthen, though year-end complacency means that the moves were very minor.
Markets reversed course however once the European session began as the debt auction in Italy went off much better than expected. 6-month bills were auctioned at rates roughly half of what they were paying just last month. This is a huge step in the right direction and means that funding costs are significantly lower. Longer-term debt will be issued tomorrow and if borrowing costs resemble what happened today, then this bodes well for risk appetite heading into the New Year. Some are saying that this has occurred because of the ECB loans given a few weeks ago that have essentially allowed the banks to set up carry trades for sovereign debt. This will increase demand and allow yields to drop which is what the indebted nations need right now.
In Switzerland, the KOF leading indicators index came in lower than expected, posting a gain of .01 vs. an expectation of .23. This cause the franc to strengthen a bit, but again, holiday trading is means these are non-factors.
In the US, mortgage applications will be due out later but will not be a factor either. Short-term traders should continue to trade the ranges, and longer-term traders should be thinking about what they would like to be in for the New Year.
The economic data is starting to look better, including retail sales figures due to the holidays so if Europe can get the debt crisis under control and if US politics can provide some sensible solutions, then 2012 could be a very god year for risk assets.
Cheap money due to US Fed policy could make its way to both stocks and commodities and while that would normally be inflationary, the inflation could be masked by lower home prices and wages due to elevated unemployment.
So there is a lot to think about for the New Year but by coming up with a plan of action, you could put yourself ahead of the game!