US Dollar gains 2.5% in one week
For sterling, we had the BoE surprise markets with a dovish tone in its latest policy statements.
Then, on the dollar front, the very strong upside surprise from October payrolls (printed at +271k vs. forecast of 180k) increased the chances of a December rate hike from the US Fed. This provided a significant boost to the dollar which had already been on the rise following the more hawkish tone from the Fed recently. Indeed, over the week, the dollar was the standout performer on the currency front, making gains of around 2.5% against both the euro and sterling. EUR/USD finished the week struggling to hold $1.07 after having started it above $1.10. Meantime, GBP/USD dropped from $1.54 to below $1.51 over the week.
With Forex markets exhibiting heightened sensitivity to monetary policy divergence and given the data dependency of this, the week ahead features some important data releases. In the US, retail sales data for October are a key release in this context as they will provide an early read on how the all-important consumer side of the US economy started Q4. Meanwhile, the UK schedule includes a raft of labour market data for the September/October period.
In the Eurozone, the calendar is dominated by Q3 GDP data (incl. Eurozone, German, French and Italian stats). Speeches from the ECB’s Draghi and BoE Governor Carney will warrant attention. Overall, from Forex viewpoint, with a US rate hike in December now a very strong possibility, the dollar may continue to hold sway. However, the $1.05-1.06 level against the euro will prove difficult to surmount.
Current Forex prices: GBP/EUR €1.40 USD/EUR €0.927 USD/GBP £0.662 USD/CAD $1.327
Draghi cannot catch a break
Mario Draghi has defined the Eurozone against a recession induced by a sovereign debt crisis, possible Greek default including a damaged financial system. However his biggest challenge will be the current Chinese and Emerging market economic crisis.
Statistician suggest that a 1% decline in Chinese GDP would have a 0.1% - 0.15% decline in Eurozone GDP. However what if the Chinese economy declines by 1%, thus what is the decline in emerging markets and then the knock on decline from these markets onto the Eurozone economy. Especially as Germany is a massive export economy and the central opinion leader of the European project.
As a result, markets are expecting Mario Draghi or as he is dubbed ‘Super Mario’ to begin the planning and eventual announcement of QE2.
Portugal’s three party swing
The socialists, left bloc and communists can combined create a parliament which would have a majority. These parties combined would have around 120 seats. As this news has emerged, it has had an effect on Portuguese sovereign bonds which rose to 2.74%.
Additionally, this would be an interesting time as the communist party wish to prepare Portugal for a Euro exist. Read more on Bloomberg
Analyst expect Aussie could be held under $0.70
Beginning this week, the Aussie took another hit from Chinese traders. Analyst expect the Aussie to float around $0.70 USD while iron ore prices are weak and the impendent monetary divergence between the Federal Reserve and Royal Bank of Australia. Read more
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