- Did Happy Friday pre-empt a Happy Monday?
On Thursday we noted the risk of a series of fortunate evidence in Italy that could conspire to produce a decent risk rally on Monday – the Senate and lower house passage of the austerity/reform bill, the resignation of Silvio Berlusconi, an announcement that Mario Monti has been charged with forming a technocratic government, and then a decent 5yr BTP auction (10:00GMT today). As of Friday night only one of these boxes had been ticked yet the strength of the rally in BTPs suggested that every one of them had. This begs the question whether Friday’s rally has pre-empted what might otherwise have been expected to occur this morning. Possible, but we would rather think that if, we see a good bond auction as result of weekend events panning out as hoped, that further room exists for EURUSD to extend gains. If this does transpire, then recent moves would suggest even better performance of the AUD and Skandies. With many in the market assuming that the ECB’s intervention over the past week was somewhat deliberately half-hearted, in an attempt to force some difficult decisions in Italy, markets will be watching for signs that the stick is to be replaced with the carrot of more aggressive intervention. Over the weekend Buba President Weidmann has made very clear once again his opposition to ECB bond market intervention, but in stressing that the current crisis of confidence is up to the new Italian government to resolve, the implication may be that he can continue to live with short term support (until the arrangements to enhance the firepower of the EFSF are agreed at the end of this month?) from the ECB to give new PM Mario Monti a chance to deliver. On a related note, today will see the usual release of the ECB’s buying through the SMP for last week; a surprisingly large number might spook markets, forcing a reassessment of the ECB’s ability to tame markets.
- Japanese data, IMF acceptance does not suggest lower intervention risk
Japan’s Q3 GDP at 6% annualised was a little above market expectations, with exports the largest contributor despite USDJPY hovering around the 77 level for much of the quarter. But while the strong print may complicate the politics of justifying further intervention, the rebound is largely a post-triple-disaster recovery affair; a revised Japanese final September IP print still showed a sharp fall from the previous month – the first since March. As such, we do not see the data as implying less enthusiasm to defend against fresh USDJPY weakness; indeed we note that (so far) the BoJ seems to have refrained from sterilising the intervention (see Chart). The MoF will also be encouraged by comments from the IMF’s Lagarde, who signalled some acceptance of the MoF’s position; although she also suggested that solo intervention was unlikely to succeed. We continue to see USDJPY leak lower; another round of action from the authorities will require either an acceleration of the move or another bout of risk aversion that sends all but the yen lower against the USD.
- German, Eurozone GDP and HICP, BoJ, RBA Minutes, US retail sales, top the calendar
While markets may remain fixated on Italian bond markets, in the week ahead there is plenty else to focus on. Eurozone (and German) GDP (Tue) and inflation (Wed) will shape expectations for another rate cut come December – a view encouraged by ECB’s Stark Friday, who said the ECB has room for manoeuvre on rates and will react if it sees downside risk to prices. While more ECB rate cuts or the rising expectation thereof, are a euro negative, any extension of the euro-peripheral bond rally should for the time being be the bigger influence supporting the euro. RBA minutes on Tuesday may or may not strengthen hopes for another rate cut in December. We expect one and some banks changed their call late last week also in favour of a move. This may help restrain AUD beneath last week’s 1.04 area highs. US retail Sales, CPI and Philly Fed top the US calendar this week.
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