- Markets lose further ground by end of US trading day
Focus on peripheral Europe and an announcement from a ratings agency managed yet again to keep risk appetite depressed. US equity markets as well as the FX markets pushed lower after a report by Fitch that eurozone contagion poses a threat to the outlook of the US banks rating outlook. While US banks have been under scrutiny for some time over their exposure to Europe, an explicit warning from the ratings agency amplified market concerns over the extent and impact of contagion. Earlier in the day, EUR was propped up by speculation that the ECB was buying Italian bonds via the SMP program. In fact, Italian yields fell below 7% by market close. Also, political developments in Italy and Greece showed some progress. In Italy, Mr. Monti announced his new government comprised entirely of technocrats which can be viewed as both positive and negative. On the positive side, the Cabinet is run by experts in the areas where much work is needed, but conversely, since none of the MPs were appointed, they may be difficult in accepting and implementing policy changes. But only time will tell how this all plays out. In Greece, PM Papademos won the confidence vote by a huge majority; 255 to 38 and talks regarding the Greek PSI are set to continue this week. In the meantime, the markets will remain focused on the political agendas of these new governments. However, EURUSD may remain under pressure given the rising costs of USD funding for European corporates and institutions. The EUR 3M cross-currency basis swap has fallen to the lowest level since December 2008. Comments from Rosengren that the current crisis might warrant coordinated action by the Fed and ECB could fuel speculation that the Fed may lower the cost for the ECB to tap the Fed’s swap lines in an effort to ease USD funding conditions and prevent a liquidity squeeze. With USD funding a rising concern, USD should remain well-bid.
- Major G10 FX forecast revisions published later today
In the latest edition of our FX Weekly to be published later on Thursday, we announce some significant revisions to our G10 FX forecasts. Uppermost is that we now expect EURUSD to weaken between now and the end of Q1 2012 (to the mid-1.20s). This is justified principally on the basis that the ECB not only cuts rates to below the previous 1% cycle low but also engages in its own form of QE, justifies by projected shortfalls in money supply/credit growth relative to desired reference rates. Yet assuming ECB QE in practice goes a long way towards alleviating euro-peripheral bond market stress and the Fed chimes in with additional QE come Q2 2011, we expect a recovery back to the 1.40 area by end 2012. The EURUSD forecast revisions have implications for other G10 pairs, most notably AUDUSD and other commodity-bloc currencies, now seen dipping below parity in Q1 before recovering in H2 2012.
- Philadelphia Fed Survey, housing starts and initials claims may break US data upside trend
US data once again managed to beat expectations, with industrial production rising 0.7%m/m vs. consensus of 0.4%m/m in October. Headline CPI fell 0.085%m/m below market expectations due to the decline in energy prices, and core inflation rose 0.1%m/m. Our economists expect core inflation to weaken through H2 2012. Thus, lower core inflation numbers should provide some comfort to the Fed members who have expressed their concern over the pick-up in core inflation over the past year. Also, the US TIC data for September showed that the UST buying was the highest since August 2012. The biggest by was Asia at USD49bn. The heavy buying of USTs coincides with the rally in DXY and VIX at elevated levels during the month of September and solidifies the fact that the USD remains the safe haven currency of choice. On today’s calendar, the Philadelphia Fed Survey, housing starts and initial claims may disappoint, but any positive surprises could prove positive for CAD.
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http://www.easyforexnews.net/wp-content/uploads/2011/11/FX-dailyNov17.pdf
BNP Paribas
Corporate & Investment Banking