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British Pound Down as BOE’s King Keeps ‘Open Mind’ on Additional Bond Purchases
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New Zealand Dollar Under Pressure Ahead of Retail Sales Report
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Euro Drops from 1.50 - Q3 GDP Next Big Event to Watch
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Australian Dollar Backs Off from 2009 Highs – Employment Data Due Overnight
US Dollar Bounced from 2009 Lows, S&P 500 Fails at 1101
Risk-related trades hit critical levels on Wednesday, as the US dollar index managed to hold above its 2009 lows while the S&P 500 tested, but wasn’t able to break above, its 2009 highs. There was little in the way of major US economic news, but we did see that the Bloomberg Professional Global Confidence Index fell to 60.3 in November from 61.7, which was the highest reading since the survey began in 2007. With 50 marking the point of neutrality for the index, the data suggests that most of the participants were still optimistic on the world economy. Through the end of the week, scheduled event risk is due to be fairly limited, at least from the US dollar perspective, which means that any breakdown in the greenback or break higher in the S&P 500 may not occur until next week, or be the result of surprise news.
British Pound Down as BOE’s King Keeps ‘Open Mind’ on Additional Bond Purchases
The British pound fell across the majors following indications that the Bank of England (BOE) would continue to implement their quantitative easing programs while many other central banks are signaling an end to these programs or are outright raising interest rates. Indeed, BOE Governor Mervyn King said that he will be keeping an “open mind” on additional asset purchases following the release of the bank’s Quarterly Inflation Report, which continued to reflect forecasts for UK GDP to stage a lofty recovery through 2010, but subsequently lag through 2011 and 2012 as there will likely be "sustained weakness of demand." King also said that a "variety of...indicators point to a more buoyant picture looking ahead," though "small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past eighteen months." Furthermore, he stated that inflation is likely to rise sharply in the near-term before falling back below the BOE's 2 percent target, which was part of the reason why the central bank expanded its quantitative easing program last week.
In other UK news, the nation’s latest labor market results showed that claims for unemployment benefits rose by 12,900 in October and pushing the claimant count rate up to a more than 12-year high of 5.1 percent from 5.0 percent. The increase in claims was the smallest since April 2008 and suggests that while conditions are still deteriorating, it's occurring at an increasingly slower pace. Overall, signs of economic improvement should continue to offer support for the British pound, but as long as the BOE relies on quantitative easing, upside potential for the currency remains limited.
Related Articles: British Pound Weekly Trading Forecast, Euro, British Pound Strength May Be Tested by Q3 GDP, BOE Inflation Report
New Zealand Dollar Under Pressure Ahead of Retail Sales Report
The New Zealand dollar was one of the weakest major currencies on Wednesday and will face the release of New Zealand retail sales at 16:45 ET today, which will offer early signs of how Q3 GDP could fare upon release in December. Indeed, Q2 GDP for New Zealand surprisingly rose for the first time since Q4 2007 on the back of a rebound in consumer spending, but the upcoming release of retail sales (excluding inflation) is projected to reflect a 0.1 percent contraction in spending, suggesting GDP could disappoint a month from now. Furthermore, a negative reading could impact rate expectations for the Reserve Bank of New Zealand, as Credit Suisse overnight index swap (OIS) rates are pricing in 212 basis points worth of increases over the next 12 months. If retail sales fall more than projected, these rate expectations could easily fall lower and weigh on the New Zealand dollar.
Euro Drops from 1.50 - Q3 GDP Next Big Event to Watch
The euro tumbled after its aggressive test of 1.50, but the currency made significant headway versus the ultra-weak British pound and New Zealand dollar. Though there was no notable European data on hand, the divergence in EURGBP has more to do with indications that the Bank of England would continue to utilize its quantitative easing program while the European Central Bank is considering exit strategies. The euro will likely see fundamentally-driven moves on Friday, though, upon the release of Euro-zone GDP. The quarterly rate is projected to rise for the first time since Q1 2008 by 0.5 percent, while the annual rate is anticipated to edge up to -3.9 percent from -4.8 percent. Overall, there are some downside risks for this report, as the purchasing managers’ index (PMI) for the manufacturing sector rose throughout Q3, but only managed to rise above 50 in October, suggesting that the sector’s contraction in activity simply waned. On the other hand, PMI for the services sector rose above 50 in September, indicating an expansion in activity. All told, any positive quarterly GDP result would likely yield a very strong reaction from the euro, but if the figure continues to signal a contraction in the Euro-zone’s economy, the currency could drop sharply on speculation that the European Central Bank will have not start to close down their liquidity programs in December.
Related Articles: Euro Weekly Trading Forecast, Euro, British Pound Strength May Be Tested by Q3 GDP, BOE Inflation Report
Australian Dollar Backs Off from 2009 Highs – Employment Data Due Overnight
The Australian dollar treaded water against many of the majors as it eased back from its 2009 highs against the US dollar. Whether AUDUSD forms a double top or breaks above 0.9326 may be semi-dependent on event risk looming for the Australian dollar overnight. The release of the Australian employment change can often be like US non-farm payrolls: difficult to product and occasionally very market-moving. This could be the case on Wednesday evening as data is expected to show that Australia lost 10,000 jobs in October, which could push the unemployment rate up to 5.8 percent from 5.7 percent. Now, this would actually signal very little change from where the labor markets have been over the past few months, as the rate of joblessness first hit 5.8 percent in June. As a result, it will take a sharp decline in jobs to elicit a strong response from the Australian dollar, while a surprise increase could provide the currency with even more support.
