The news stream is shaping the foreign exchange market in arguably a clearer way than recently has been the case. As we noted here yesterday the level of anxiety and fear of a US default appeared to have peaked on Tuesday, perhaps helped by an olive branch of sorts offered by President Obama, supporting a short-term extension of the debt ceiling and spending authority, while new negotiations can take place. Moreover, that the dollar advanced on indications of Yellen's nomination, also seemed to suggest perceived bad news had been discounted.
As Winston Churchill once famously quipped about Americans...they're willing to do the right thing after exhausting all the other possibilities come to mind. The other alternatives have been exhausted, it would seem. Even though some of the rhetoric remains heated, there is growing evidence that the worst of this round has passed, and there is movement toward a short-term fix.
This, however, may not be good enough for some US creditors. Earlier this week, there has been some discussion among investors, and one must imagine, policy makers as well, how China, for example, or a Middle East country, would respond to a missed bill or coupon payment. There was some speculation of the possibility of seizing private sector assets. This seems a bit over the top, and today, it appears China, through its financial center in the Special Administrative Region, Hong Kong, expressed its displeasure. Hong Kong officials hiked the discount (haircut) on US T-bills (up to 1-year in duration) used for collateral.
The BOE meeting concludes today and given the forward guidance, no change in policy and no statement is most likely. Sterling has not recovered from yesterday's break. Sterling came back to test the neckline of the technical pattern as is often the case, but it was turned back from a little above the $1.5950 area. We look for a continuation of the pullback, confirming that the 14-cent rally is over.
In today's price action, the Scandinavian currencies are trading the heaviest among the majors. This is data driven. Norway's CPI came in well below expectations (0.5% vs consensus of 0.9%) and the underlying rate, which excludes taxes and energy, also was lower than expected. The year-over-year headline rate fell to 2.8% from 3.2% and the underlying rate fell to 1.7% from 2.5%. This has encouraged market participants to push out, deeper into next year, when the Norges Bank may hike interest rates. The euro has rose to fresh 3-year highs against the krone. The NOK8.20 level was briefly penetrated, and while it may be overdone in the short-run, on a longer-term basis, there does seem risk toward NOK8.30-NOK8.35.
Sweden reported slightly softer than expected CPI (0.4% vs 0.5%), keeping the year-over-year rate at 0.1%, but the real shocker was the dramatic weakness in the industrial output. It fell 2.3%. The market had been expecting a 0.5% gain. In fairness this is a volatile series. The initial July estimate of 0.7% was more than doubled in the revision to 1.8%. It's helpful to see that some of what was anticipated in August took place in July, but not enough. The year-over-year pace slumped to -6.9% from a revised -2.8%. The combination of data is renewing speculation that the Riksbank may have to cut rates again after all. The euro has pushed through the SEK8.80 level. There does not seem to be a good technical reason why the euro cannot reset the year high near SEK8.90 seen in late June.
After the Scandis, the yen is the weakest of the majors. This seems to be more a reflection of position adjustments after the dollar had slipped below its 200-day moving average earlier this week and began to recover. The economic data from Japan was noteworthy on two counts. First, August machinery orders rose more than twice the consensus estimate of 2.5% and posted a 5.4% gain. This may help ease some concern about the weakness in capex plans seen in the Tankan Survey. It also would seem to suggest increased exports.
Second, the MOF reported that Japanese investors sold a record amount of foreign bonds last week (JPY2.225.7 trillion or ~$24 bln). This edged out the previous record in October 2011. Given the fiscal drama in the US, one cannot help but suspect that this was a liquidation of short-term US paper. Yesterday we pointed to the importance of the Federal Reserves custody holdings for more insight into what the official account may be doing. That release is today, not yesterday, as we had indicated in error.
The Australian dollar has traded on both sides of yesterday's rather narrow trading range. It initially traded higher in response to news that consumer inflation expectations had risen to 2.0% in October from 1.5%, and news that the unemployment rate unexpectedly fell to 5.6% from 5.8%. However, participants quickly realized that a decline in the unemployment rate was partly about the continued decline in the participation rate. Actually job growth was disappointing. The 9.1k increase, about half of which were part-time, did not even offset the revised 10.2k loss of jobs in August. The Aussie recovered in the European morning, but appears to be running out of steam around $0.9450.
In the euro area both French and Italian industrial production figures disappointed. Italian industrial output fell 0.3% rather than increase 0.6% as the consensus expected. Energy output was a significant drag. The data warns that the economy likely contracted in Q3. Note that yesterday the cabinet approved 1.6 bln in new savings (2/3 spending cuts) to try to reach the 3% deficit target. However, the risk is still a bit of an overshoot, not just because of economic under-performance, but also due to the lost revenue (~2.0 bln+) of the scrapped property tax.
French output edged higher by 0.2% in August. After the 0.6% decline in July, the consensus had expected a larger recovery (0.6%). Manufacturing tells the story. It rose half of what was expected and the 0.3% increase follows a revised 0.8% decline in July. This continues to bear out our theme that the PMI survey data has been considerably more optimistic than the real data warrants.