The Week Ahead--Week of October 14th, 2012
Updated Oct 12, 2012 1:30:00 PM Written by Eric Viloria, CMT
Highlights
- Dollar consolidates ahead of heavy data week
- Pressure mounts on Spain to act
- Is more easing coming from China and Australia?
Dollar consolidates ahead of heavy data week
This
past week, the dollar traded in a relatively tight range with no
significant catalysts and few major economic releases out of the US.
Sentiment fell moderately with US treasury yields and equities moving
lower on the week to test key technical levels. The 10-year treasury
yield is currently testing the 100-day simple moving average (SMA) and
the S&P 500 is approaching the 55-day SMA around the 1424 zone. The
dollar drifted higher but continues to consolidate in what appears to be
a bear flag pattern as seen on a daily dollar index chart. Also of
note, the 80.00 level in the DXY has contained daily closes despite
intraday tests above the figure and while this continues to be the case
the technical picture remains bearish.
In the week ahead, a busy US data calendar is likely to provide traders with market moving reports. September retail sales, Empire manufacturing, and business inventories kick off the week on Monday. The September consumer price index and industrial production are due out on Tuesday. Key housing data for September such as housing starts, building permits, and existing home sales will also be released next week. Labor market data will include weekly initial jobless claims which will be closely monitored given that the most recent reading fell to a 4-year low, however market participants have largely disregarded the print as the labor department indicated the decline was mostly the result of one state.
There are several Fed speakers scheduled next week as well including FOMC voters Dudley, Williams, and Lacker. Dudley and Williams supported additional purchases by the Fed while Lacker opposed the decision and was the sole dissenter at the last FOMC meeting. Investors will be watching for clues on when the Fed will adjust the current QE program. Chicago Fed President Evans has indicated that he favors purchases while the unemployment rate remains above 7% and inflation below 3% and Minneapolis Fed President Kocherlakota this week reiterated his call for the Fed to maintain rates at the zero bound until unemployment falls below 5.5% and as long as inflation remains below 2.25%. The USD has been driven more by risk sentiment as opposed to monetary policy expectations as the Fed’s QE program is anticipated to remain in place for some time. However, with the recent positive surprises in US labor data (0.5% drop in the unemployment rate in 2 months, 4-year lows in jobless claims) there is scope for data to correct from the potential outliers seen of late. Weak labor data would likely weigh on the USD as it is generally negative for risk sentiment and may also see markets adjust Fed stimulus expectations.
In the week ahead, a busy US data calendar is likely to provide traders with market moving reports. September retail sales, Empire manufacturing, and business inventories kick off the week on Monday. The September consumer price index and industrial production are due out on Tuesday. Key housing data for September such as housing starts, building permits, and existing home sales will also be released next week. Labor market data will include weekly initial jobless claims which will be closely monitored given that the most recent reading fell to a 4-year low, however market participants have largely disregarded the print as the labor department indicated the decline was mostly the result of one state.
There are several Fed speakers scheduled next week as well including FOMC voters Dudley, Williams, and Lacker. Dudley and Williams supported additional purchases by the Fed while Lacker opposed the decision and was the sole dissenter at the last FOMC meeting. Investors will be watching for clues on when the Fed will adjust the current QE program. Chicago Fed President Evans has indicated that he favors purchases while the unemployment rate remains above 7% and inflation below 3% and Minneapolis Fed President Kocherlakota this week reiterated his call for the Fed to maintain rates at the zero bound until unemployment falls below 5.5% and as long as inflation remains below 2.25%. The USD has been driven more by risk sentiment as opposed to monetary policy expectations as the Fed’s QE program is anticipated to remain in place for some time. However, with the recent positive surprises in US labor data (0.5% drop in the unemployment rate in 2 months, 4-year lows in jobless claims) there is scope for data to correct from the potential outliers seen of late. Weak labor data would likely weigh on the USD as it is generally negative for risk sentiment and may also see markets adjust Fed stimulus expectations.
Pressure mounts on Spain to act
This
past Wednesday, S&P cut Spain’s sovereign debt rating to one notch
above non-investment grade and the reaction in the bond markets has been
positive. Spanish yields are currently around 5.65% which nearly 15bps
below Wednesday’s close. The move by S&P brought Spain’s rating in
line with Moody’s which has the country rated just above junk status.
More importantly, markets view the cut as adding pressure to the Spanish
government to request financial assistance through Europe’s now active
rescue fund, the European Stability Mechanism (ESM), which would trigger
the ECB’s bond buying program, the Outright Monetary Transactions
(OMT).
The EUR has been buoyed by expectations of a bailout, however both German and Spanish officials have denied that a bailout is imminent. Spain’s reluctance to request aid is likely to persist as officials do not want to be constrained by strict conditions. Furthermore, Spain has maintained a relatively optimistic stance with regards to growth prospects and deficit cutting measures, however we have noted that these projections may be cause for concern. This week Rajoy said that he aims to prove IMF forecasts wrong (the IMF forecasts contraction of -1.3% in 2013 while the Spanish government is anticipating a -0.5% drop in growth). Germany’s Schaeuble has reiterated that Spain does not need a bailout.
On Thursday, Spain is scheduled to auction government bonds including 10-year bonds. This will be a test to see if the country can continue to finance itself without tapping the rescue fund. The same day, European leaders gather in Brussels for a two-day Summit.
The longer Spain waits, the more nervous investors may get which could see sentiment decline and weigh on the EUR. Moody’s is expected to complete its review by the end of this month and a downgrade from the ratings agency would label Spain as junk, or below investment grade. This would likely push yields higher and the euro lower as the currency has had an inverse correlation with Spanish government bond yields.
The EUR has been buoyed by expectations of a bailout, however both German and Spanish officials have denied that a bailout is imminent. Spain’s reluctance to request aid is likely to persist as officials do not want to be constrained by strict conditions. Furthermore, Spain has maintained a relatively optimistic stance with regards to growth prospects and deficit cutting measures, however we have noted that these projections may be cause for concern. This week Rajoy said that he aims to prove IMF forecasts wrong (the IMF forecasts contraction of -1.3% in 2013 while the Spanish government is anticipating a -0.5% drop in growth). Germany’s Schaeuble has reiterated that Spain does not need a bailout.
On Thursday, Spain is scheduled to auction government bonds including 10-year bonds. This will be a test to see if the country can continue to finance itself without tapping the rescue fund. The same day, European leaders gather in Brussels for a two-day Summit.
The longer Spain waits, the more nervous investors may get which could see sentiment decline and weigh on the EUR. Moody’s is expected to complete its review by the end of this month and a downgrade from the ratings agency would label Spain as junk, or below investment grade. This would likely push yields higher and the euro lower as the currency has had an inverse correlation with Spanish government bond yields.
Fig 1: Spanish government bond yields have remained low despite a recent downgrade
Source: Bloomberg, FOREX.com
Is more easing coming from China and Australia?
In
the week ahead, there is a slew of data due out of China which includes
September trade balance figures, consumer and producer prices,
industrial production, and retail sales. 3Q GDP growth is also scheduled
to be released with the market consensus expecting a continue slowing
in growth to 7.4% y/y from the prior 7.6%. The September trade surplus
may narrow, and consumer prices are expected to slow to 1.9% y/y from
the prior 2.0%. The data may provide Chinese officials to react with
additional stimulus that has been long awaited by markets. Recent
comments from People’s Bank of China (PBoC) Governor Zhou indicated
concern over external headwinds and the potential for additional
measures to support the Chinese economy which fueled speculation that
more stimulus is on the way. This has kept Chinese equity markets
relatively well supported and also helped the AUD to rebound this week
as the Australian economy is closely tied to that of China. Today in
Tokyo, Reserve Bank of Australia (RBA) Governor Stevens said that
China’s slowdown matters for Australia.
Officials in Australia have expressed concern over persistent currency strength and even noted at the most recent policy meeting that “the exchange rate has remained higher than might have been expected”. Gov. Stevens said that commodity prices fell more than expected and Australia GDP growth is softening. He went on to say that the RBA has scope to move on interest rates. Minutes from the RBA’s October meeting will be released on Tuesday and are traders will be looking for any indication of further rate reductions.
Weak Chinese data can see a knee-jerk reaction lower in the AUD, however this may turn into Aussie strength as expectations of China stimulus increase. Another factor impacting the AUD is the RBA’s stance and more dovish minutes are likely to weigh on the currency while a neutral stance or indications that the RBA may pause on rates next month could be viewed as supportive for the Australian dollar. Technically, AUD/USD sees a key pivot above the 1.03 figure which is where the 100-week simple moving average (SMA) and 200-day SMA currently reside. While the pair remains below the 1.0340 200-day SMA, the technical outlook is bearish and a convincing break above would negate the bearish technical bias.
Officials in Australia have expressed concern over persistent currency strength and even noted at the most recent policy meeting that “the exchange rate has remained higher than might have been expected”. Gov. Stevens said that commodity prices fell more than expected and Australia GDP growth is softening. He went on to say that the RBA has scope to move on interest rates. Minutes from the RBA’s October meeting will be released on Tuesday and are traders will be looking for any indication of further rate reductions.
Weak Chinese data can see a knee-jerk reaction lower in the AUD, however this may turn into Aussie strength as expectations of China stimulus increase. Another factor impacting the AUD is the RBA’s stance and more dovish minutes are likely to weigh on the currency while a neutral stance or indications that the RBA may pause on rates next month could be viewed as supportive for the Australian dollar. Technically, AUD/USD sees a key pivot above the 1.03 figure which is where the 100-week simple moving average (SMA) and 200-day SMA currently reside. While the pair remains below the 1.0340 200-day SMA, the technical outlook is bearish and a convincing break above would negate the bearish technical bias.
Fig 2: Chinese and Australian GDP growth are closely related
Source: Bloomberg, FOREX.com
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