At 1.3525 and 1.0150, respectively, both the EUR and AUD are around a cent above yesterday’s lows (a five-week low in the case of the single-currency). The ECB reportedly purchased Italian and Spanish bonds which prevented a climb in yields and this helped trigger a short-covering rally in the EUR and AUD. There was no rout in European stock markets. Industrial metals and crude oil are higher, failing to provide the signal to sell the AUD and knock it below parity. However, the S&P500 has fallen by around 1% serving to pare the AUD’s recovery.
Also appearing to calm nervous investors was the Fed’s Rosengren saying that the European debt crisis may require co-ordinated action between the ECB and Fed. However, the situation in Europe remains volatile. Mario Monti was sworn in as Italy’s new prime minister but Italian 10-year bond yields remain close to 7%. Moreover, concerns over France’s credit rating persist with the spread of its 10-year bond yield over Germany rising to 188bps, the highest since the euro’s launch in 1999. There was also continuing worries about European bank funding costs, with Italy’s largest bank Unicredit asking the ECB to broaden the range of assets its accepts as collateral for its liquidity provision.
The GBP under-performed thanks to the Bank of England’s Inflation Report saying the UK growth outlook was “markedly weaker” and due to a rise in unemployment, suggesting that further policy easing may be necessary down the track. UK 10-year bond yields briefly fell to a record low of 2.1058%. The news on the jobs market was dismal. The ILO unemployment rate rose 0.2pp to 8.3%, its highest since January, 1996, while youth unemployment rose above 1 million for the first time since 1992. Should the European debt crisis stabilise then AUD/GBP will be a lot higher.
We’re sounding like a broken record but there was more good US economic news. Industrial production was up 0.7%mom (0.4% expected) with capacity utilisation back above pre-Lehman levels. Core CPI inflation printed at 0.1%mom in October, as forecast, which suggests the annual rate will moderate from its current 2.1% going forward, providing room for further Fed policy easing if needed. The better US economic news and rising Euro-zone growth and debt concerns is playing out in some divergence between AUD/USD and the S&P500. Over the past month the S&P500 is up 2.1% while the DJ Stoxx Europe 50 has fallen 3.7%. So far in November, the S&P500 is higher but AUD/USD is lower. EUR/USD is trading more closely with the yield differential (at least directionally) which has been narrowing, while AUD/USD is better correlated with European stock markets (than the S&P500) reflecting the fears a Euro-zone recession/bank crisis leads to a global recession and plunge in commodity prices.
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National Australia Bank