FYI | Sep 03 2013
By Kathleen Brooks, Research Director UK EMEA FOREX.com
European stock indices have mostly opened higher today. The chief driver of markets so far this week has been the better tone to economic data, especially in China, the Eurozone and the UK. What is interesting about that grouping is that the UK is leading the way. Only a few months ago the economic outlook for the UK remained deeply uncertain, now consensus seems to be building that the Bank of England will need to raise interest rates before its Forward Guidance suggests. The continued decline in Syria tensions is also keeping geopolitical risks at bay for now, however, with Obama likely to start lobbying Congress this week to back retaliatory air strikes we can’t rule out a return of market jitters.
Central banks are key for FX
From an FX perspective central banks remain the key drivers of the G10 currencies. This week there is a plethora of central bank meetings. We have already had the RBA, more of that later. The rest of this week includes the Bank of Poland, Bank of Canada, Bank of Japan, the Swedish Riksbank, the Bank of England and the ECB. The market is treating each central bank differently and it is having big repercussions for currencies:
BOE: The market doesn’t buy that rates will remain on hold for the next 3 years and is challenging the bank to scale back its guidance in the coming months. The exceptional manufacturing PMI report from the UK on Monday suggests the economy is firing on all cylinders, however it could have made for uncomfortable reading at the BOE: the inflation component of the index increased dramatically. The governor passionately pledged to bring inflation back to target in a speech last week; however it’s unlikely he will be able to do this if he also wants to keep rates low for the long term. When the market challenges the BOE’s dovish credentials it has been pound positive. 1.5700 is still key resistance.
ECB: The European central bank has been at the back of everyone’s minds of late as other CB’s have taken centre stage and Europe has been on holiday. In the absence of a sovereign crisis and the prospect of a recovery, albeit a tepid uneven one, this suggests that the ECB is not going to introduce anything new and rock the boat at this critical stage. The Bank’s vague commitment to forward guidance is likely to keep downward pressure on the EUR for now. EURGBP lost its grip on the 200-day sma support and this is weighing on EURUSD, which is below 1.3200. 1.3145 – 200-day sma, is the next key support to watch out for.
Fed: Like the ECB, the market has been ignoring the Fed since the lacklustre Jackson Hole conference failed to deliver anything we didn’t know already. That will all change later this week when the payrolls report for August will be released on Friday, which could determine the pace of the Fed’s tapering programme. The dollar is already on the rise, the broad-based dollar index breached the 100-day sma earlier at 82.40, this is a bullish development from a technical sense, but to get significantly higher then payrolls on Friday have to play ball.
BOJ: Everyone expects them to announce some form of easing in the next few months. If they signal this when they meet later this week then expect the yen to tank. The yen is already losing ground as Syrian fears reduce the need for a safe haven. The break above 99.00 in USDJPY was a bullish development, however to get significantly above 100.00 will be dependent on payrolls and what the market thinks the Fed will do next.
RBA: The Australian central bank kicked things off this week with its meeting earlier today. The RBA uses the currency as a monetary policy tool – it actively talks it down if it wants to loosen monetary policy. After cutting rates by 225bps in two years has it come to the end of the line? At this morning’s meeting it struck a more neutral tone when it came to the Aussie saying that it was “possible” there could be further Aussie depreciation, which sounded fairly limp especially considering the Aussie is down 15% since April this year. This was like a red rag to a bull and the Aussie dollar has jumped more than 100 basis points since the meeting. 0.9250 is the level to beat, the high from 19th August. The Aussie is likely to remain in focus tomorrow, Aussie Q2 GDP is released, however as we proceed through the week the outlook for the Aussie will be dependent on the US dollar and the prospect for Fed tapering.
A big goodbye from Ballmer
What is interesting is that even amidst the uncertainty surrounding monetary policy, particularly the Fed’s policy, along with the uncertain outlook for economic growth, global deal making remains elevated. The latest big announcement came from Microsoft’s EUR 5.4bn deal to buy Nokia’s phone business and its patents. This is one hell of a final gesture from outgoing CEO Steve Ballmer, however when you have a cash pile as large as Microsoft’s finding the right things to buy can be the difficult bit. Microsoft will be hoping that it has bought the company at the right moment – Nokia’s Lumia phones have been one of its rare “success” stories of recent years.
Spanish unemployment declines by 31 people…
Elsewhere, Spanish unemployment was steady in August. After falling 64.9k in July, it defied the odds in August, with unemployment falling by 31 people, yep, that’s correct, 31. Spain’s economy minister is talking, he says this shows the economy is stabilising, however we want to see if this improvement in the employment picture is just seasonal and will reverse in the autumn before we see it as a sign of stabilisation. He also said that Spain should see slightly positive growth in the second half of this year.
Could EM weigh on the broader market?
Ahead today, the US markets may play catch up with their European counterparts, while on the data front, UK construction PMI and US ISM are the key releases. We are also keeping an eye on emerging market currencies. The rupee and the Turkish lira are significantly lower today and the Indian stock market is also down. We are watching to see if negative sentiment in the EM space filters into the broader market and weighs on stocks later today.
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