November’s secondary trend stalled towards the end of the week, as both the slide in the Dollar and the rally in the equity markets came to an abrupt halt. The dollar index found support throughout the week after bouncing higher during Monday’s session. Even though economic news still favored lower levels for the U.S Dollar, the Dollar held its ground, which coincided with a turn in the equity markets. For the week, the S&P 500 index was down 4 points of .4% closing at 1089.
The week started off on a positive note as the broad US equity index broke through the 1,100 mark setting a high for the year 2009 at 1,110 points. Global markets where lifted by positive news out of Asia.
Japan’s economy grew more than expected in the third quarter, at the quickest pace in more than two years. GDP annualized rose 4.8%, up from the 2.7% pace in Q2 and significantly quicker than the 2.9% pace that was expected by analysts. The economy expanded 1.2% in Q3 from the previous quarter, compared with 0.7% pace in Q2.
The main driver was the pickup in domestic demand boosted by government stimulus programs. Though the data was clearly encouraging, the numbers released throughout the week emphasized that cutting back in government spending could hamper growth in upcoming months.
On Tuesday and Wednesday a wave of U.S data was released, which caused major volatility on the Forex and equity market. On Tuesday US headline PPI rose 0.3% m/m in October (core fell -0.6%). The market was expecting the headline to increase 0.5% and the ex-food and energy component to rise 0.1%. The data provide little evidence that the US dollar’s weakness and the rise in import prices in Oct are feeding through to producer prices.
Wednesday, the Labor Department released the CPI figure. The seasonally adjusted consumer-price index rose 0.3% in October, compared September’s 0.2% increase. The core CPI, which strips out food and energy, advanced by 0.2% in October, the same increase seen in September. housing starts data released on Wednesday decreased 10.6% to a seasonally adjusted 529,000 annual rate compared to the prior month, while economists surveyed by Dow Jones Newswires had forecast a 1.7% increase. The 10.6% fall carried construction to the lowest point in six months. Meanwhile, building permits in October fell 4.0% to a 552,000 annual rate. Economists had expected permits to rise by 0.9% to a rate of 580,000. One must note that building permits are a sign of future construction. The numbers now show that despite all the government’s efforts the housing sector is still dealing with its share of problems. In addition, when taking a glance at the homeowner vacancy rates one can see that the numbers have shot up – this is a clear sign that there is still plenty of inventory on the market.
The equity markets came under significant pressure on Thursday as the dollar began to rally. Market participants were apathetic with regard to jobless claims. The number of U.S. workers filing new claims for jobless benefits last week remained unchanged from the prior week. According to the Labor department, initial claims for jobless benefits remained steady at 505,000 in the week ended Nov. 14. The previous week’s level was revised to 505,000 from 502,000.
On Friday The European Central Bank Friday took its first small step towards unwinding the unprecedented stimulus measures installed to rescue the financial system after last year’s global credit crisis. The bank said in a surprise announcement that it will tighten the standards under which it accepts newly issued asset-backed securities as collateral from banks for its refinancing tenders from March 1, 2010. It also said it would extend the tighter standards to all ABS from March 1, 2011.
Forex:
Fed Chairman Bernanke’s comments on Friday about the dollar revealed a clear picture regarding possible price activity, expressing his concerns about the economy rather than the value of the Dollar. In his speech Bernanke outlined the conditions under which the dollar’s movement would become more relevant to the conduct of monetary policy — if the change of its value jeopardized the Fed’s ability to achieve the dual mandate of full employment and price stability. It is this commitment to its dual mandate and to what Bernanke called the “underlying strengths of the US economy” that will “help ensure that the dollar is strong and a source of global financial stability.” Bernanke took the chance in his speech to respond to recent comments from officials at the weekend APEC meeting that claimed that the low US interest rates and weak dollar were financing a “huge carry trade” that was having a “massive impact on global asset prices”. Bernanke essentially indicated that US monetary policy would be set according to the needs of the domestic economy (in terms of its dual mandate) rather than global capital flows.
Across the other side of the Atlantic, the Sterling came under pressure this week as investors preferred to jump out of riskier assets. The BoE’s prediction that inflation would pick up came to pass with England’s CPI results (up 1.5% y/y pace from 1.1% in Sept). According to analysts, CPI is expected to post further gains in coming months given the base effects from last year; recent gains in fuel prices and an expiring VAT tax. Despite the possible higher prices, the BOE warned that while inflation could be volatile in coming months, exceeding the 2% BOE’s target now was not the time to begin removing accommodation.
One must recall that after the release of the minutes from the Bank of England’s most recent meeting Nov 5, traders turned sour on the GBP. The Monetary Policy Committee voted to increase the bond-buying program by £25 billion, taking it to a total of £200 billion since inception. Investor’s now fear that the band could opt for further stimulus to help the U.K economy, something that could batter the Pound. Governor King said last week that he had an ‘open mind’ on whether further bond purchases would be needed.
On the housing front, UK house prices slipped back in November, breaking a run of three months of advances as demand dimmed in the run-up to Christmas. Rightmove said sellers reduced prices by 1.6% from a month earlier when they climbed 2.8%. Prices are 1.6% higher than they were a year ago, but still down more than 6% from the peak in May 2008. The continuing concerns about the flow of lending in the economy, not just though mortgage lending but also corporate credit, were reinforced by a report from the British Chambers of Commerce last week that said credit availability was getting worse.
From a technical point of view the Pound finished below its 20 day moving average, after dropping back into recent range.
Over in Australia, the Reserve Bank of Australia described the speed of prospective rate hikes in coming months as an ‘open question.’ The minutes from the last meeting Nov 3 revealed some caution from the policymakers in terms of balancing risks of inflation against the possibility of putting a brake on a vulnerable recovery, but failed to say whether recent rate hikes were coming to an end. According to officials, business and consumer confidence could prove ‘fragile’ as the effects of government stimulus programs and handouts fade. To date futures are suggesting a more than a 50% chance of a hike to 3.75% at the RBA’s next meeting.
Technically the AUD/USD seems to have held its 20 day moving average and is now trading on trend line support.
The Week Ahead
Next week the markets will be watching the EMU purchasing managers index to start the week, followed by US Existing Homes Sales. On Tuesday EMU Industrial Order, will precede US GDP, Personal Consumption and Spending. On Wednesday, the UK GDP will start off the day, with US Durable Goods and Jobless Claims to follow. Thursday is a light day for economic activity and the US markets will be closed for US Thanksgiving. On Friday EMU Consumer Confidence with close the week.
Daily Forex Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
