– FX markets in a range, Asian equities mixed
– US employment likely robust, but limited impact on risk sentiment
– Bank of Mexico likely to keep policy rate unchanged at 4.5%
What to watch for today
CAD: Jobs update. The consensus forecast is that employment rose 20.0K in November. Employment fell sharply in October, bolstering expectations for policy easing, but subsequent data have been better and fading recession fears in the US have prompted markets to scale back the rate cut probability. USDCAD is likely to remain highly directional with the broader environment in the near term, and we continue to see scope for near-term upside as conditions in Europe worsen.
USD: Employment stays on track. Payroll employment is expected to improve from last month’s pace, with our economics team forecasting a +170k reading for headline and +190k for private payrolls. The consensus forecast is for +125k and +150k, respectively, but expectations are likely higher following the strong ADP number. With markets entering December with much less recession fear priced in than at the beginning of November, we think there is considerably less scope for upside data surprises to bolster risk sentiment or offset negative news from Europe.
MXN: No change. We expect Bank of Mexico to leave the repo rate unchanged at 4.5% at today’s meeting. Our economists note that the central bank will likely stay in “waiting mode”, still hoping to get more clarity as to the unfolding direction of the European crisis. Furthermore, following the announcement of daily USD sales earlier this week, the bank will likely want to assess the impact of the intervention measures before starting an easing cycle. While we are constructive on the peso over time, we think the currency is at risk to a reintensification of euro stress and expect to see USDMXN return to levels around 14.25 in Q1.
What happened overnight
Range trading ahead of US non farm payrolls. Asian equities are mixed, with the Nikkei up 0.2%, while the Shanghai composite index is down 1.4%. EURUSD is largely unchanged around the NY closing level of 1.346 despite more constructive comments from European policy makers. AUDUSD is down slightly to 1.0225. The CNY is outperforming amongst Asian currencies after China’s central bank fixed USDCNY lower for the third consecutive day by -43pips to 6.3310. We think the recent bounce in US ISM creates a foundation for Asian FX to recovery in Q1 (See below).
EUR: ECB hints at more bond purchases if rules on public finances are tighten. ECB President Draghi hinted in testimony to the European parliament that agreements to strengthen rules on government fiscal budgets would create room for the ECB to respond more aggressively to credit market and economic stress in Europe. French President Sarkozy said that the euro is in danger of breaking up if fiscal policy fails to converge, suggesting that European leaders are moving closer towards agreeing to steps toward fiscal union in the run-up to the 9-10 December Eurogroup heads of state meeting.
EUR: Italian budget deficit may be less than forecast. Italy’s treasury said in an e-mailed statement that the 2011 budget deficit may be less than its most recent forecast of €64.8bn. The November deficit of €8.5bn put the January-November deficit at €68.75bn, but the budget typically generates a surplus in the month of December.
JPY: Weak capital spending, rising monetary base. Japanese capital spending fell 9.8%yoy in Q3, more than the 7.8%yoy fall in Q2 and the consensus forecast for a 3.6%yoy drop. However, reflecting the Bank of Japan’s asset purchases, monetary base growth accelerated to 19.5%yoy in November from 17.0%yoy in October.
What to read today
2012 Outlook: Piecing Together or Falling to Pieces?
For 2012, we expect that Europe’s politicians will accede to the pressures from markets and their colleagues in the international community and take steps to restore the coherence of the Continent’s finances. Thereafter, we expect a continuation of the struggle against credit stress as the world’s leading central banks – including the ECB – seek to preserve the option of prosperity, employment, and progress.
We present forecasts for fundamental economic performance and a variety of financial opportunities, with specific trade suggestions to help our clients and customers navigate the year ahead. We thank you for the business relationships we have enjoyed in the year past and look forward to continued productive interaction in 2012.
US ISM creates the foundation for Asia FX recovery.
In a report published today we show that Asian FX rates have historically strengthened after troughs in the US ISM with a lag of about two months. Yesterday’s higher than expected ISM suggests a trough in US manufacturing activity and an improving outlook for Asian exports in Q1 2012. The immediate risk is that euro area credit stress short circuits this both by depressing Asian export demand and by possibility stalling the US recovery. This increases the importance for Asia of the ECB and euro area politicians delivering positive outcomes over the next week.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/12/document-932777241.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS