The currency blog

As I mentioned yesterday, we are a bit light on the ground data-wise this week so I apologise in advance if I repeat myself to pad the market analysis out. One point not mentioned was regarding the one day trade forum hosted by China overnight. In it, Vice-premier Wang Qishan expressed support for the European Unions attempts to control the sovereign debt crisis in Europe. The news helped the Euro claw back some of the losses incurred in the European and American trading sessions, but this morning’s announcement by rating agency Moody’s that it is placing Portuguese debt on review in light of a possible downgrade, means the Euro has started the day on the back foot. On the plus side for the single currency, German consumer confidence remains high according to figures released this morning. But it has slipped back from highs of a month ago and missed the forecast level of 5.7.
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The current weather in London provides the perfect analogy for the markets this week. The Met Office is advising people to stay indoors after London was hit by heavy snow, and that is exactly the same thing investors will be doing with their money this week.  Expect very light trading conditions, and current themes across the Euro, Dollar and Sterling will almost certainly continue into the New Year. Eurowise, the IMF released a staff report on the viability of the economic reforms in Ireland and it was not pretty reading. According to the IMF the pressures facing the Irish economy are ‘intense’. The market reaction? The Euro Dollar chart on Friday looked like a black run at Chamonix. 2011 will not bring any rest-bite for the single currency. More countries will be pulled into the markets crosshair, and that means more Euro weakness over the coming weeks and months. We all remember that the Greek story was like observing a slow motion car crash. It seems inevitable that the same drawn-out fate lurks in wait for several more Eurozone nations, and viability of the single currency rests on the ability and patience of Germany to keep playing backstop.
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Preliminary jobless claims fell yet again as had been expected and the 4-week average result sustained in its downtrend. The Philadelphia Fed manufacturing survey rose above consensus predictions, which indicates that the ongoing increase in activity is occurring at a faster rate than economists are predicting. On the less positive side, housing starts were up, though not as high as anticipated, and building permits came in weaker. The US Congress though, gave final approval to extending the expiring Bush-era tax cuts. On the whole, news and data were deemed good news for equities and US indices advanced and the Dollar came off. Markets were relatively quiet in Asian trading with no noteworthy news or data.
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Neither US or Asian Markets were able to sustain the volatility that we saw yesterday in Europe and exchange rates were little changed first thing from where we left them. Traders were therefore keen to lock in the profits from Wednesdays moves and accordingly lifted Eurodollar and cable by about 50 points in early business. Ahead of today’s Spanish 10-year bond auction, however, this might easily prove tempting to traders looking to go short again.
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In their post meeting statement, the Federal Reserve continued to cite high unemployment, tight credit and reduced household wealth as the main economic headwinds in the US economy even though inflationary pressures remain contained. The Fed kept interest rates on hold, and detailed their plans for further QE. The committee also suggested the size and scope of further QE will be reviewed as the situation develops and left the door open for increases in the amount of securities the Fed will purchase if needed. The slight change in tone, from concerned to mildly optimistic, mirrored the bond markets recent volt face. Bond yields have begun to rise towards more normalised levels, signalling renewed belief in a sustained economic recovery and underpinning the recent Dollar strength. US retail sales came in above forecast for a fifth month in a row, which although coming from a low base, is at least moving in the right direction and also lends support to the USD.
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Yesterday China intimated that their interest rates will be kept on hold in spite of inflation rising by 5.1% annualised, and the lack of liquidity on the run up to Christmas has placed the dollar on a downward spiral rather than any economic fundamentals. Consequently the market is in a state of confusion this morning with speculators appearing more than ready to wind down their positions heading into the weekend whilst the data/economic releases calendar holds plenty of potential for some good movement.
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