By: Ben Myers
Last week proved to be yet another difficult period for traders as we saw continued high volatility in the markets, often going directly against the fundamental analysis; making trading from trends a difficult task.
EUR
Dominating events last week was the EU Summit in Brussels, which ended with the UK vetoing any changes to the EU Treaty and produced only detail-less plans for the reinforcement of budget caps and for automatic mechanisms from all members to reduce spending and increase tax revenues should deficits breach 3% preventing further troubles. The most clear cut proposal was, however, the 200bn euro increase in the bailout funding that would move capital in the central banks to the IMF and be recycled back into the EU. The decision to increase the capacity of the European Stability Mechanism was deferred till March and investors were kept on edge by uncertainty in whether or not the European Central Bank will now form a much larger role in stabilizing the Eurozone’s bond market. This week sees bond sales for Spain Italy, Greece, Belgium, France and Germany. These generally offer a clear take of market confidence and investors should be keeping close watch on the borrowing costs as bank level credit conditions– how much the banks in the Eurozone charge one another, are a very important indicator to the health of the markets. An increase in borrowing costs may prompt a ratings downgrade following on from Standard & Poor’s warning of a mass downgrade of 15 members of the Eurozone, including most notably France, Spain and Italy.
USD
The Greenback enjoyed another week of trading within a volatile range that lacked significantly in direction. A relatively empty economic calendar last week meant that the EUR/USD exchange rate remained virtually unmoved a week on as investors held their breath on events unfurling in the troubled Eurozone. Thursday provided some positivity for the US economy as the number of people filing for unemployment assistance fell to the lowest level since the end of February, dropping to 381,000 after a being at 404,000 the previous week. The economic calendar looks far busier in the US next week, with data being released on Advance Retail Sales data, a Federal Open Market Committee meeting rate decision, and Consumer/Producer Price Index inflation results. No real surprises are expected nor any shifts in economic policy on the horizon. Any unexpected data released may result in sharp movements of the USD,but with late December a traditionally quiet time in the markets, expect a continued intraday volatility and events in the Eurozone to possibly trigger aggressive short selling, trading on the weaknesses in Europe and the EUR.
GBP
The GBP ended the week up 0.4% against the USD as stocks continued to rally on hopes of a solution to the EU debt crisis. The UK economy is showing its fragility at the moment as fears of a double dip recession increasingly grow; this despite the news this week that the UK managed to reduce its trade deficit to £7.6bn, down from £10.2bn in September. Despite the improvements, analysts are urging caution and that the improvement is unlikely to be repeated. Hopes that inflation could be edging down were boosted by the news that the price of goods leaving UK factories eased in November. Year on Year, prices rose 5.4%, down from October’s figure of 5.7%.
Interest rates were kept at the record low of 0.5%, as they have been since March 2009. This week sees the U.K. publishing government statistics on consumer price inflation, which accounts for most of total inflation as well as industry data on house price inflation, a leading indicator of strength in the housing market – a key part of the UK economy. On Wednesday, unemployment figures are to be released and with an increase expected. The GBP looks likely to come under pressure as the Bank of England looks to put more liquidity into the economy, looking to boost the delicate recovery.
JPY
The Japanese Yen continued to be locked into a choppy price range with the USD as fundamental analysis pushed the Yen down whilst fears of further governmental intervention capped the down to about the 76.00 level. The Yen has been one of better performing currencies since the global crisis hit the world’s economies and proven to be safe haven of choice for many investors. This week sees the release of some key manufacturing sector activity data, but once again, events in Europe should play an important role in the Yen and investors will once again be looking out for signs of a BoJ intervention. The 5 trading sessions this week failed to produce any real movement in the Yen; the USD/JPY ended the week only slightly down at 77.48.
Summary
Traditionally a quiet time in the markets, the soap opera drama that is the Eurozone will take center stage, with a Bullish outlook for the USD. The greenback’s performance this upcoming week is dependant on events surrounding the EUR and whether or not any surprises come from key fundamentals in the US this week. Expect more intra-day market volatility and trends continuing to be hard to track.