FX markets in limbo. Currency report Dec 5By james tweed • Dec 5th, 2011 • Category: Currency
Significant items this week:
Tues 6th Dec Australia – Reserve bank Interest rate decision – rate cut likely
Canada – Bank of Canada – no change expected
Wed 7th Dec UK – Oct industrial production
EMU – German Industrial production
US – Consumer credit
Thurs 8th Dec UK – BOE MPC meeting
EMU – ECB meeting
Fri 9th Dec UK – Oct Trade Balance
EMU – German Trade Balance, Nov CPI
US – Consumer confidence
EU leaders summit – announcement expected.
The FX markets are in a state of limbo at present as they await the outcome of several Central Bank initiatives. Last week was dominated by a concerted Central Bank effort to bolster market confidence and boost liquidity by cutting the price of emergency USD loans. The Fed, ECB, BOE, Japan and Switzerland all joined together to enable lending of USD to be reduced. This action and some glimmers of hope in the Eurozone saw bond yields in several EU member states decline to more palatable levels. There are also increased signs of resilience in the US economy. Non-farm payrolls increased by 120k in Nov, and previous months had their figures revised upwards which has resulted in a sharp drop in the unemployment figure to 8.6% from 9% – which is the best it has been for over 2 years. European finance ministers are meeting again to discuss how to boost the EFSF (European Financial Stability Fund). The big plan from Germany and France is a system of centralising fiscal controls and budgets with a move towards fiscal union. Whatever is announced by the 9th – the EFSF will not raise enough money to convince investors it can bail out a Spain or Italy as well as plug holes in their banks. It will need to act together with the IMF and the ECB – but Germany is not keen. In the face of a broad global slowdown, only the US economy seems to be seeing some modest acceleration in growth.
In the UK the Chancellor gave his Autumn report, announcing the outlook was still bleak, and summed up best as “more cuts, more pain, more borrowing” His aim to eliminate the structural deficit has been pushed back to 2017 from 2015 and we shall have to borrow £111bn (7% of GDP) extra over the next 5 yrs and that public debt will likely top 78% of GDP. This all reflects the expected slowdown in growth for the next 5 years. The key influence on all of these forecasts is an orderly solution to the Eurozone crisis. The outlook for the UK would be dramatically worse if the Eurozone issue has a meltdown. Only a Turkey has a worse outlook for the next few weeks!