IMF and Eurogroup Negotiations Hold Off Greek Aid

USD/JPY: Looking for Help from Retail Sales & Fed Minutes
GBP: Rise in CPI Means No Additional QE in Dec
AUD: Businesses Unfazed by Recent Improvements
CAD: Oil and Gold Prices Unchanged
NZD: Retail Sales Plunge in Q3
JPY: More Political and Economic Uncertainty in Japan

While the British pound ended the day virtually unchanged against the U.S. dollar and euro, there’s no ignoring the fact that U.K. inflationary pressures are on the rise. Consumer prices rose 0.5% last month, driving up the annualized pace of growth to 2.7% from 2.2%. This huge jump took annualized CPI growth to its highest level in 5 months, which in our opinion all but guarantees steady monetary policy for the Bank of England next month. The price for food, clothing and services increased significantly with a particularly large rise in university tuition fees. As part of their deficit reduction measures, lawmakers voted to allow universities to triple its fees to up to 9,000 pounds a year starting with this year’s new batch of students. Input prices also increased on the producer level but output price growth slowed. The sharp rise in consumer prices will validate the concern of policymakers who have been worried that inflation is not falling fast enough. With CPI reversing trend, their calls to leave monetary policy steady will only grow louder. The Bank of England has one more meeting before the end of the year and we now see a 90% chance of no change to their asset purchase program. The central bank’s Quarterly Inflation Report will be released on Wednesday and we expect to see renewed concerns about inflation. UK employment numbers are also on the calendar but no major improvements or deterioration is expected for the labor market.

Today also sees the release of September UK labour market data. Much has been made of the rise in employment (and fall in the headline unemployment rate) this year given UK economic growth. However, recent evidence suggests that the adjustment to weak output is being made via lower hours instead of headcount. We expect the September numbers to show a continuation of this adjustment, with employment growth over the quarter slowing to 125k although the more timely claimant count is forecast to provide conflicting signals, falling a further 5k in October.

On the economic front the news offered no solace to euro bulls as both French labor data and the German ZEW survey missed their mark. In France the payroll employment numbers printed worse than expected at -0.3% versus -0.2% eyed. This was the worst reading in more than 18 months and the third month of contraction out of the past four. The news bodes badly for EZ second largest economy as it continues to teeter on the edge of recession.

In Germany the ZEW survey came in at -15.7 versus -9.9 eyed as investor sentiment degraded after improving the month prior. The weak reading is a clear signal that Germany cannot decouple from the rest of Europe and therefore remains vulnerable to a recession in 2013 as well.

However, perhaps the greatest stress to risk FX was coming from the credit markets where periphery yields were starting to tick up once again. Italian yields on the benchmark 10 year were at 5.04% while Spanish bond yields were at 5.96% – dangerously close to the psychologically important 6% barrier. If credit markets continue to sell off the downside pressure on the EUR/USD will increase with shorts eyeing the 1.2650 and perhaps even the 1.2600 handle as the day progresses. The policy paralysis amongst EZ leaders in combination with deteriorating economic data is clearly starting to weigh on the euro.

The slide in U.S. equities this month weighed heavily on USD/JPY and other major currencies. A large part of the weakness has been due to concern about the impact of President Obama’s policies on the wealth of American businesses and consumers. While the Fiscal Cliff poses a major risk to the future trajectory of the U.S. economy, we shouldn’t forget that there have been improvements that could still make the dollar more attractive than other currencies. Case in point is the non-farm payrolls report. With the steep slide in stocks, it is hard to remember that job growth exceeded even some of the most optimistic expectations in the month of October. Consumer confidence rose across the board last month, which should have supported consumer spending. There’s no question that the recent turn of events probably made Americans more nervous and less willing to spend but economists are looking for a very small increase in retail sales last month which means it won’t take much for the data to beat. Aside from solid job growth and an increase in confidence, the International Council of Shopping Centers reported a 4.4% increase in sales compared to a year earlier. Spending was particularly strong at wholesale clubs such as BJ’s and Costco where pre-Sandy buying drove up sales. If retail sales beat expectations, it could simultaneously lift USD/JPY and risk appetite. Yet don’t expect spending to be strong enough to exceed September’s levels because a similar survey from Johnson Redbook actually reported a decline in spending.

While there have been a few nerves around the Eurozone in the last week or two, they don’t really seem substantial enough to justify the decline we have seen in EUR/CHF. Below 1.2050 the risk/reward in EUR/CHF looks biased to the upside, given the continued recommitment of the Swiss authorities to the 1.20 floor. Despite expectations of a cut in rates from the Riksbank in Dec, the SEK looks better value than the CHF here.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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