Following a lacklustre start, EUR/USD is trading below last night's close; the yen is higher across the board. The rally in risk that was apparent yesterday has fallen foul with European stock market following their Asian counterparts lower. Overnight a monthly report from the S.Korean Finance Ministry stated that it was still 'unclear' whether the economic rebound will be sustained, while RBNZ's Bollard made the point that the NZ economy had suffered recession and its economic recovery is slower and more vulnerable than that in Australia. UK production data while on first examination appeared healthy did little to alter persistent concerns over lack of growth in the UK economy.
UK industrial production rose a faster than expected 1.6% m/m in Oct. However, downward revisions spoilt the tone. The ONS reported that late responses to its Monthly Production Inquiry combined with revisions caused by seasonal adjustment factors being re-estimated has caused the growth rate for Production to be revised down -0.2% in July and -0.1% in Aug. Although Production is only 17% of the total UK economy, this does not support hopes that the UK Q3 GDP data will be revised higher on Nov 25.
Key event of the session today will be whether the BoE opts to increase QE and if so buy how much. The market appears to be fairly confidence that more QE is on its way but it is uncertain as to whether GBP25 bln or GBP 50 bln will be the favoured quantity. Supporters of QE continue to stress that the lack of clear inflation pressures suggests there is room for these plans to be extended. However, the lack of significant response in either money supply or inflation indices could equally be illustrating that these plans are not having a significant impact on the real economy and are therefore no longer appropriate. A GBP25 bln could thus be seen as an indication that the Bank may want to step back from this policy as early as February and thus could bring some support to the pound this afternoon.
The ECB will be watched today for any clues as to whether it will maintain its 12 mth cash tender beyond the end of this year. Adding extra funds into the money market has been the crux of the ECB's special policy measures and the ECB may argue that conditions in the banking sector have started to normalised. While it is conceivable that the EUR may find some support on such news, it should not be viewed as a precursor to a rate hike. The persistence of negative CPI rates suggests low ECB rates for many months yet.
The confusion that initially followed last night's FOMC policy statement has settled down. The market appears to be content with the view that very little has been materially altered by the Fed. The spelling out of the conditions on which unchanged rate are based is little more than another statement of the obvious but while this list presently provides justification for the Fed's dovish stance, any change could be seen as providing the 'get-out' from easy policy which may appease the hawks.
NZ's unemployment rate rose to a higher than expected 6.5%. While this was caused by a higher participation rate which is a function of greater confidence in the job market, the poorer headline number underpinned the concerns illustrated in Bollard's speech and pushed AUD/NZD higher.
US data this afternoon includes initial claims and nonfarm productivity.
