Currency Focus – Weekly Forex Commentary | 29th October 2012
Greenback looks to US jobs/Presidential Election for direction
Once again, US markets remained capped under the weight of earnings last week with another round of less-than-encouraging reports from corporate America. While the majority of companies reporting have beat estimates, revenue forecasts have – for the most part – failed to meet expectations. The S&P500, a broad barometer of equity performance and sentiment, fell 1.48 percent over the week. Nevertheless, a degree of solace has been felt given some tentative signs of improvement on the macro front, however still not enough to overcome broad based concern over the health of corporate America. Friday’s US Gross Domestic Product estimate showed the economy grew at an annual rate of 2.0 percent in third-quarter, ahead of expectations of 1.8 percent and second-quarter growth of 1.3 percent. Still, with the finer points of the data showing the rise was driven by a surprise increase in government defense spending, markets remain unconvinced underlying demand is enough to materially bring down the rate of unemployment.
Euro eyes critical support as Spanish bailout optimism wavers
Although one of the worst performing currencies of the week, the Euro remained in the confines of the ‘market noise’ category rather than a material breakout of its current range. Expectations of a happy ending to Greece’s troika negations and a Spanish bailout request have cushioned the Euro in recent times, and despite the odd hiccup we saw more of the same, finishing a moderate 0.66 percent lower against the greenback. From a technical perspective, a move below $US1.2820/25 may spell danger for the Euro, while a move above its September high of $US1.3175 carries a high probability should the stars align and Greece, Spain and the data pulse from both sides of the Atlantic begin to show signs of life.
The week ahead will see Germany, Greece and Spain share the spotlight, with German CPI the first long list of directives. Preliminary consumer price data for October is expected to see a 0.1 percent fall representing a yearly inflation rate of 1.9 percent from a previous 2 percent. Likewise the Euro-Zone inflation estimates released later in the week are expected to show consumer price growth of 2.5 percent from a previous 2.7 percent. True to form, markets will be watching these releases closely in the context of interest rates, with any significant deviation to the downside likely to fuel speculation of further ECB easing.
USD-JPY falls from 4-month high ahead of BOJ policy meeting
After peaking at a 4-month high last week, the trajectory for the USDJPY pair quickly turned south on Friday, finishing the week a moderate 0.42 percent higher at 79.65. Prospects of Bank of Japan stimulus underpinned a much welcomed yen decline throughout the week, but flows quickly changed direction on Friday with exporters locking in favorable rates ahead of the weekend, amid further negativity after the latest inflation report which showed consumer prices fell for the fifth consecutive month. Expectations the BoJ will pump – at least – another 10-trillion Yen at this Tuesday policy meeting have been well and truly baked into the market, implying a significant risk of reversal should the bank fail to appease.