By Dean Popplewell
It difficult to remain engaged in a market that is nearly almost closed this side of the Atlantic. Participants are very much distracted by Hurricane Sandy’s images of destruction that dominates all forms of media. By day’s end, she is expected to cause as much as $20b in economic damage just being one of the biggest Atlantic storms that has made landfall. We are constantly reminded that it’s the first time in over a century that weather has stopped U.S. equity trading for two consecutive days. Pricing and liquidity were an issue for FX in late afternoon yesterday and should be again this morning, that is until more participants are willing to engage in the FX market.
Spain was expected, the market had been pricing it in, to ask for aid at the last Euro-group meeting in early October. However, she disappointed and many FX positions were unraveled to provide collateral for the next “sure” bet. What is probably preventing a request is that the bond market pressure on Spain has now been lifted. It’s reported that Spain and her periphery-suffering ally, Italy, have no near term plans to be using the bond-buying program that the ECB has offered, nor to support a recent proposal for a super-commissioner. Instead, the Spanish prime minister and his Italian counterpart continue to insist that they intend to push for rapid adoption of a European fiscal and banking union.
Spanish data beat market expectations this morning. Spain’s Q3 GDP was to release a negative -0.4% headline. However, a -0.3% contraction was announced, beating most expectations. On a year/year basis, the Spanish economy has contracted by -1.6% and this Q3 contraction makes it’s the fifth consecutive headline retreat. This market has been starved for so long for some good news from Spain. This small retreat has allowed some risk-on to be applied. It has been noticed by the tightening of debt product spreads in FI. Big picture, the market will be constantly monitoring on how Spain’s economic weakness will impact the country’s ability to meet its fiscal needs. For now, the Spanish government view is that it can get by any help.
There was no surprise in the BoJ expanding its asset purchase program. However, there was in the amount. The BoJ’s +¥11t unanimous decision seems to have gone down like a lead weight for USD/JPY bulls. The market had been expecting a meaningful sum of around +¥20b. This smaller token can only appease politicians for so long. It is certainly not an insignificant amount, but a headline number that is unlikely to make a difference to Japan’s struggling economy. Policy makers have also kept the December 2013 deadline for its AP program and its +1% inflation goal. Lost in the headline euphoria was the implementation of a new loan program with no upper limit for now. Expect the BoJ to continue to consider ongoing powerful easing until the country data finds that consistent traction. So far the market has continued the chaotic move from last week’s 80.38-USD/JPY buying is expected just ahead of 79.00.
U.K. data this morning shows consumer credit rising (+GBP1.2b), mortgage lending on the up (+0.5b) and mortgage approvals expanding. The BoE has to be happy with these positive developments, however, like any of the euro nations, sustainability of growth remains a concern and an economic priority. It seems that U.K.’s FLS program is finally promoting some of anticipated just rewards.
EUR shorts continue to dominate positioning despite the EUR bouncing sharply from its double base of around 1.2885. Good market bids are congregating near this level, just ahead of a plethora of CTA stop losses. Expect option expiries to dictate some of today’s market. Nearest option expiries are located at 1.29, 1.2925 and 1.3000. Who is doing the EUR pulling or pushing? EUR/JPY short covering favors the single unit higher short term. First time around traders will be expected to fade the stops at 1.2970-75.