• FX: Don't Blame End of World for Higher Friday Volatility
  • EUR: Inflation Not a Problem in the Eurozone
  • GBP: BoE Worried about Growth and Inflation
  • CAD: Retail Sales Beat, Yet Another Piece of Good Data
  • AUD: Government Admits that Budget Surplus Goals will Not be Met
  • NZD: Business Confidence Weakens
  • JPY - FX Traders Still Betting on More Easing from BoJ


FX: Don't Blame End of World for Higher Friday Volatility

We expect the volatility in the financial markets to increase over the next 24 hours but not because the world will come to an end.  The chance that the Mayans were right is highly unlikely but if their predictions are fulfilled, don't expect any market commentary on Friday.  Instead, if there is an increase in volatility tomorrow, it will be because of Quadruple Witching and/or position adjustments ahead of year- end. Four times per year, contracts for stock index futures, stock index options, stock options and single stock futures (SSF) expire at the same time. This can usually lead to erratic price action in the equity market and since currencies like to take their cue from equities, the volatility in stocks can mean volatility for currencies.  Next week is also Christmas and many investors like to take the time between Christmas and New Years off.  With Fiscal Cliff talks still unresolved, those investors who prefer to spend the end of the year with family than checking the markets could choose to reduce their positions or hedge their exposures.  Therefore if there is an increase in volatility on Friday, it won't be because the world is coming to an end.  

Overall, the rally in equities and stability in currencies suggest that investors are still hopeful that a deal will be reached.  While we will continue to keep an eye on Fiscal Cliff headlines, there is a number of U.S. economic reports scheduled for release tomorrow.  This includes personal income, personal spending, the PCE deflator, durable goods and the University of Michigan Consumer Confidence report. More improvements are expected in U.S. data, which should lend support to risk appetite. Today, final Q3 GDP numbers showed the U.S. economy expanding 3.1% in Q3, compared to a previous forecast of 2.7%.  According to the commerce department, consumer spending, exports, state and local government spending was stronger than initially estimated.  Jobless claims increased to 361K from 344K, which was right in line with expectations.   Although higher jobless claims are usually indicative of weaker labor market conditions, last week's sharp decline was also a big surprise.  Manufacturing conditions in the Philadelphia region also improved significantly with the index rising from -10.7 to +8.1, its highest level in 8 months.  Existing home sales jumped 5.9%, topping 5 million for the first time in 3 years. Inventories also fell to an 11-year low as the Fed's low interest rate policy provides continued support to the housing market.  The details show that not only are inventories shrinking and more homes being sold but prices are going up as well.  The only source of weakness in today's reports were leading indicators which fell 0.2% in November, but an upward revision to the October report took some of the sting away.  Overall, it has been a very good day for U.S. data.  The latest economic reports paint a picture of an ongoing recovery in the U.S. economy that should only gain momentum from the Fed's supply of liquidity.


EUR: Inflation Not a Problem in the Eurozone

The EUR/USD did not extend lower despite Wednesday's sharp intraday reversal.  The currency pair held above 1.32, a former resistance level and even came within 10 pips of its 8 month highs during the early North American trading session.  There was no major Eurozone economic data released this morning.  German producer prices was the only release on the calendar and prices declined as expected in the month of November.  Unlike the Bank of England, the European Central Bank has no real reasons to be worried about inflation. As long as this remains the case, the central bank will keep its promise to provide unlimited liquidity.  Italian elections will become a focus in the New Year with Italian papers reporting that Mario Monti may run in election against Silvio Berlusconi. While he has done a very good job of lower borrowing costs for Italy and reducing the risk of a default, he may not have enough support to win the election.  However his party could form a coalition with the Democratic Party, which may help him secure a role in the new government.  Meanwhile the Swiss Franc traded higher against all of the major currencies thanks to stronger trade numbers.  A 6% rise in exports helped to boost the country's trade surplus to 2.95B from 2.73B.


GBP: BoE Worried about Growth and Inflation

The British pounded traded higher against the U.S. dollar and euro despite weaker retail sales.  Consumer spending stagnated in November after falling 0.7% the previous month.  Lower auto prices contributed to the lack of demand but even without the impact of fuel costs, retail sales rose a mere 0.1%.  As the year draws to a close, we can tell that without the one-off factors that drove demand higher during the summer, the U.K. economy would probably be on weaker footing because overall, the trend of consumer demand is weak. The volume of retail sales was also flat, confirming that consumers are retreating back into their shells and without stronger holiday spending in December, GDP growth will slow significantly in the fourth quarter.  This year has been a tough one for the U.K. with the economy contracting in Q1 and Q2 and rebounding in Q3 only because of temporary factors such as the Queen's Jubliee and London Olympics.  Yet the Bank of England has been unable to give the economy the stimulus it still needs because the risk of inflation has increased with the abundance of liquidity already pumped into the economy. Consumer confidence is due for release this evening along with the final revision to Q3 GDP, public finances, current account and index of services on Friday.


CAD: Retail Sales Beat, Yet Another Piece of Good Data

The Canadian and Australian dollars rebounded against the greenback while the New Zealand dollar ended the day unchanged.  Thanks to stronger labor market conditions, Canadian retail sales soared in the month of October. While part of the 0.7% increase was from higher demand for autos, retail sales ex autos still rose 0.5% as consumers spent more on clothing and food.  This improvement in demand is consistent with the recent upside surprises in data that reflect an ongoing recovery in Canada.  Stronger consumer consumption and job growth also validates the Bank of Canada's hawkish monetary policy stance and the U.K. government's choice of an effective central bank governor to turn their economy around.  Canadian GDP and CPI figures are scheduled for release tomorrow - we expect the data to show acceleration in economic growth.  No major economic reports were released from Australia but the country's Finance Minister said the government won't be able to meet their budget surplus goals. While this may hurt Australia's rating, keeping some government expenditures in place should be good for the economy.  Weaker GDP growth in New Zealand was followed by softer business confidence and activity outlook.  Credit card spending numbers are due for release tomorrow and another weak report could lead investors to question the RBNZ's comfort with the current level of monetary policy.


JPY - FX Traders Still Betting on More Easing from BoJ

All of the Japanese Yen crosses ended the North American trading session unchanged or higher and that includes USD/JPY whose strong intraday reversal suggests that the pair still wants to test 85.00. Last night, the Bank of Japan increased asset purchases by 10 trillion yen, which was right in line with expectations.  Unfortunately, USD/JPY collapsed because investors were disappointed that the central bank did not do more.  While the BoJ continued to provide additional support to the Japanese economy, investors hoped for a more aggressive approach to monetary policy such as open-ended purchases or a higher inflation target.  Given the deterioration in economic activity since the last central bank meeting, the BoJ had to act, but Shirakawa chose the most moderate option.  Nonetheless USD/JPY and all of the other Yen crosses have recovered because the BoJ does "plan" to examine their 1% inflation goal, which suggests they are not completely averse to the idea of raising the inflation target next year.  The fact that USD/JPY is above 84 indicates that investors are not ready to give up on their Yen shorts with BoJ monetary policy still expected to get easier over the next year.