EUR: Inflation Not a Problem in the Eurozone
GBP: BoE Worried about Growth and Inflation
CAD: Retail Sales Beat, Yet Another Piece of Good Data
AUD: Government Admits that Budget Surplus Goals will Not be Met
NZD: Business Confidence Weakens
JPY – FX Traders Still Betting on More Easing from BoJ
The British pound traded higher against the U.S. dollar and euro despite weaker retail sales. Consumer spending stagnated in November after falling 0.7% the previous month. Lower auto prices contributed to the lack of demand but even without the impact of fuel costs, retail sales rose a mere 0.1%. As the year draws to a close, we can tell that without the one-off factors that drove demand higher during the summer, the U.K. economy would probably be on weaker footing because overall, the trend of consumer demand is weak. The volume of retail sales was also flat, confirming that consumers are retreating back into their shells and without stronger holiday spending in December, GDP growth will slow significantly in the fourth quarter. This year has been a tough one for the U.K. with the economy contracting in Q1 and Q2 and rebounding in Q3 only because of temporary factors such as the Queen’s Jubilee and London Olympics. Yet the Bank of England has been unable to give the economy the stimulus it still needs because the risk of inflation has increased with the abundance of liquidity already pumped into the economy. Consumer confidence is due for release this evening along with the final revision to Q3 GDP, public finances, current account and index of services on Friday.
The EUR/USD did not extend lower despite Wednesday’s sharp intraday reversal. The currency pair held above 1.32, a former resistance level and even came within 10 pips of its 8 month highs during the early North American trading session. There was no major Eurozone economic data released yesterday. German producer prices was the only release on the calendar and prices declined as expected in the month of November. Unlike the Bank of England, the European Central Bank has no real reasons to be worried about inflation. As long as this remains the case, the central bank will keep its promise to provide unlimited liquidity. Italian elections will become a focus in the New Year with Italian papers reporting that Mario Monti may run in election against Silvio Berlusconi. While he has done a very good job of lower borrowing costs for Italy and reducing the risk of a default, he may not have enough support to win the election. However his party could form a coalition with the Democratic Party, which may help him secure a role in the new government. Meanwhile the Swiss Franc traded higher against all of the major currencies thanks to stronger trade numbers. A 6% rise in exports helped to boost the country’s trade surplus to 2.95B from 2.73B.
Overall, the rally in equities and stability in currencies suggest that investors are still hopeful that a deal will be reached. While we will continue to keep an eye on Fiscal Cliff headlines, there is a number of U.S. economic reports scheduled for release today. This includes personal income, personal spending, the PCE deflator, durable goods and the University of Michigan Consumer Confidence report. More improvements are expected in U.S. data, which should lend support to risk appetite. Yesterday, final Q3 GDP numbers showed the U.S. economy expanding 3.1% in Q3, compared to a previous forecast of 2.7%. According to the commerce department, consumer spending, exports, state and local government spending was stronger than initially estimated. Jobless claims increased to 361K from 344K, which was right in line with expectations. Although higher jobless claims are usually indicative of weaker labour market conditions, last week’s sharp decline was also a big surprise. Manufacturing conditions in the Philadelphia region also improved significantly with the index rising from -10.7 to +8.1, its highest level in 8 months. Existing home sales jumped 5.9%, topping 5 million for the first time in 3 years. Inventories also fell to an 11-year low as the Fed’s low interest rate policy provides continued support to the housing market. The details show that not only are inventories shrinking and more homes being sold but prices are going up as well. The only source of weakness in today’s reports were leading indicators which fell 0.2% in November, but an upward revision to the October report took some of the sting away. Overall, it has been a very good day for U.S. data. The latest economic reports paint a picture of an ongoing recovery in the U.S. economy that should only gain momentum from the Fed’s supply of liquidity.
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