FX Market Overview

Thursday was characterised by two main events; the Eurozone debt ‘resolution’ and the surprise rise in US economic growth. There were all manner of other data to watch but these were the two key items and both were influential individually but when combined, the improved investor sentiment was market moving.
The Eurozone story is one of initial enthusiasm for the fact that EU leaders had reached an accord on how to resolve the Greek debt crisis but that was followed by concern over just how this was to be implemented and nervousness over the fact that China would be required to front up some of the funds to expand the EFSF fund to the mooted €1 trillion. China’s response was cool to say the least and one Chinese spokesman is quoted as saying that lending to the Eurozone was ‘filled with difficulties’ while President Sarkozy talked of not seeing a reason to refuse Chinese assistance. There is then a query over whether the funds from China are being offered or requested; I suspect the latter. .
So the story is far from being over and the ‘entant’ is not as ‘cordiale’ as many had hoped. The Mer-kozy team continues to drive the plan forward and the in-fighting continues; President Sarkozy says Greece should never have been allowed to join the Euro and Harvard University economist Kenneth Rogoff says the Euro doesn’t work and that Greece will leave the Eurozone eventually anyway. We can’t escape the feeling that this is still only a short term measure which skirts around the key point and that is that a shared currency will only work where treasury and central bank policy are shared as well. Europe is not yet ready for that.
The US story is a more upbeat one. The American economy grew by 2.5% in the third quarter of the year; well above expectation and nearly double the Q2 growth. The figure was surprisingly good considering the poor manufacturing and durable goods data we have seen recently. In spite of - or more probably because of - the encouraging US data, the US Dollar weakened across the board. That is a feature of the markets these days; good data caused upbeat investors to pull out of safe harbours like US government bonds and Swiss banks to move to higher yielding assets.
Amidst all this confusion, Sterling had a mixed day; stronger against the beleaguered US Dollar but weaker against the recovering Euro and weaker against the higher yielding Aussie and Kiwi Dollars. Poor retail sales data contributed to the feeling that the UK is a ,ong way from being out of the woods and that the economy could post zero growth for the last three months of the year. That would be an embarrassment for the government but there can be little doubt that the predominance of public debt concerns in Europe does give the chancellor every reason to argue for a continuation of the debt reduction plans.
Away from Europe, the Reserve Bank of New Zealand left its base interest rate on hold at 2.5% overnight. That ‘wait and see’ approach was expected and he NZ economy is not robust enough to withstand higher interest rates at the moment but there is little doubt in the markets that the next interest rate move will be a hike.
The Australian Dollar is unsurprisingly stronger; offering, as it does, one of the most attractive interest rates in the developed world. That’s an attraction that could get even more interesting on Tuesday when the Reserve Bank of Australia meets to set its interest rate policy. There is an outside chance of an interest rate rise but most analysts expect the current 4.75% to remain in place for the rest of the year at least. Nevertheless, the mere hint of a higher interest rate is enough to keep the Aussie Dollar strong for the next couple of trading days.
Today’s data diary is pretty light which will give traders pause for thought as we approach the month end. We do get US personal income and expenditure figures and the university of Michigan consumer sentiment index so the afternoon session will be vibrant but the morning is likely to be dominated by rumour and quote over the Eurozone.
The financial crisis in Europe has at least prompted a few funnies. These are doing the rounds on the internet.
Q A Greek and Irishman and a Portuguese guy walk into a bar and order drinks. Who picks up the tab?
A The German
There is apparently a joke doing the rounds in Germany that for €400 you can adopt a Greek. He'll stay at your place, sleep late, drink coffee, have lunch and then take a nap, so you can go to work.
Q: "How many European finance ministers does it take to change a light bulb?
A: None because “There's nothing wrong with the light bulb."