- EURUSD ends flat after another day in the EZ-headline tumble dryer
There seems to be no end to the euro zone headline-driven buffeting being inflicted on the spot FX market, but somewhat fitting that EURUSD ended the NY trading day little changed from where it opened in Asia – as too US stocks. This was despite the undeniable evidence of a significant gulf between France and Germany on how the EFSF should best be levered and Germany reportedly threatening to cancel Sunday’s EcoFin summit at one point during the day. We now have the promise of two EcoFin meets, one on Sunday and one mid-next week, the latter now the new line in the sand for agreeing the details of a plan involving the second Greek bail-out, bank recapitalisation and – evidently the big current sticking point – EFSF leverage. On the plus side, the Greek parliament passed the latest set of austerity measures. On the negative side, Italian and Spanish benchmark 10yr bond yields both blew out by 10bp or more, Italy back on the 6% handle at one stage before closing marginally below. Outside the EZ headline-mania, the US data flow perpetuated the impression of a positive growth momentum. Philly Fed at 8.7 up from 17.5 in September comfortably beat expectations with new orders showing an equally impressive bounce. Initial unemployment claims meanwhile are still trending slightly lower.
- Friday’s news flow does not look like being Euro-friendly
That EURUSD ended flat on a day when European equity markets and (more important) the Spanish and Italian bond markets were showing increased signs of exasperation at France and Germany’s seeming inability to agree on the EFSF, owes something to the fact the positive US economic news headlines are doing something to hold up risk appetite and keep the dollar on the defensive. Note in this respect that commodity currencies were mostly firmer Thursday even through oil initially fell on reports of the death of Muammar Ghadhafi. The absence of any sign of Eurozone officials aiming to secure EFSF firepower greater than EUR1tn – in which case concerns that the fund will not, in whatever guise is eventually agreed, be able to effectively backstop Italy and Spain – could play on market nerves into the weekend. We also have the prospect of receiving further evidence Germany is in recession, courtesy of the latest IFO release and where falls are expected in all three headline readings (business climate, current economic assessment and expectations). If so, this may further raise expectations that the ECB will cut rates at its next policy meeting on Nov 3. It will also increases the reverberations from press reports claiming that S&P is going to issue a warning on Friday that a double-dip recession in Europe could imperil France’s AAA rating and also lead to further downgrades for Spain, Italy, Ireland and Portugal. Earlier this week, the ZEW institute claimed Germany was now in recession, and IFO readings in line with expectations will be suggesting similar (see Chart). It is hard to make a case for wanting to own euros into the weekend, but it might also be fitting if EURUSD ended the week completely unchanged – which would mean just shy of 1.3900.
- Canadian CPI to have bearing on next week’s BoC meeting
It is hard seeing anything outside the Eurozone that can provide significant distractions Friday. The economic calendar is pretty bare (nothing from the US, but Fed’s Kocherlakota, Fisher and Yellen all speak and too the former Fed’s Hoenig). Canadian CPI is of interest heading into next week’s Bank of Canada meeting. The consensus is for headline inflation to remain stuck at 3.1% (+0.2%m/m) with the core rate rising to 2.0% from 1.0% and so bang in the middle of the 1-3% BoC target range. Such an outcome will support a steady-as-she-goes message from the BoC next week, though we still see a risk of a cut as early as December. This though is contingent on a change in hue from the incoming US data and which is then seen bringing additional Fed policy easing back to the table. But if the CPI data is seen consistent with steady policy and risk does not suffer greatly into the weekend, CAD should come to no harm.
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