FX Market Overview

The day began with no agreement by the “Super Committee” in Washington on measures to reduce the federal deficit. Although in theory they have until today to reach an agreement it is now unlikely that a consensus will be reached before next year’s presidential elections. Sentiment declined throughout the day on the now usual Eurozone fears with Germany in particular voicing their opposition to the European Central Bank (ECB) coming to Europe’s rescue. Initially German Finance Minister Schauble warned that the ECB cannot finance Eurozone member countries and German Chancellor Merkel continues to demand that weaker economies accept painful austerity measures even as the debt crisis threatens to envelope France, considered Germany’s partner in managing the crisis.
Investors have demanded higher interest rates from French government bonds and Moody’s, the ratings agency, warned that a continued rise in Frances borrowing costs could put the countries AAA rating at greater risk of a downgrade. Something has to give as Chancellor Merkel has already stated that “ if the Euro fails, then Europe fails” so the stakes could hardly be higher. However by refusing to budge on demands for greater austerity Germany is in danger of derailing the entire project and is certainly weighing on the Euro.
US data also deteriorated with Personal Consumption Expenditure coming in at 2.1% versus an expected 2.3% and perhaps more importantly the second reading of US Q3 Gross Domestic Product (GDP) growth figure being revised down to 2.0% from a previous 2.5%. The US Dollar was bought as investors sought safe havens and the Sterling / Dollar exchange rate deteriorated from $1.5650 to $1.5590.
In the UK Chancellor Osborne’s deficit reduction plans were lifted after it emerged that borrowing fell by more than expected in October. Public sector borrowing fell to £6.5Billion in October against £7.7billion a year earlier. The market awaits the Chancellors budget statement next week particularly after the Prime Minister has warned us that controlling Britain’s debt was “proving harder than anyone envisaged” so it is no surprise that Sterling is struggling to sustain any rallies.
Overnight the news that HSBC’s flash Purchasing Managers Index (PMI) for China in November came in at a disappointing 48.0, a 32 month low following an October reading of 51.1, disappointed the market. This PMI figure is the earliest indicator of China's manufacturing activity with a reading above 50 indicating the sector is expanding while a reading below suggests contraction. This poor figure which reflects weakness in both output and new orders sparked a bout of risk aversion with the Australian dollar losing over a cent in value against the US Dollar from $0.9858 to session lows of $0.9756.
Today attention will turn to Europe, with reports that the bailout of the Franco-Belgian bank Dexia is on the verge of collapse and that France may be forced to increase their contribution otherwise their highly valued AAA status could be threatened. Additionally Belgium’s cost to borrow money has risen to over 5% after would be Prime Minister Elio Di Rupo resigned on Monday. Presently Belgium do not have a government in place to be toppled however it is clear that contagion is on the increase and it is surprising that the Euro is not lower than it is.
We have already seen the manufacturing PMI data from Europe with German manufacturing index reported lower at 47.9, however the services PMI were slightly improved at 51.4. The Euro which had weakened ahead of these figures firmed slightly on the mixed news with the GBP/EUR exchange rate lower at €1.1570 from €1.1600. In the current environment it is difficult to see a reason to hold Euros and of higher levels is expected.
Further focus today will be on the release of the Monetary Policy Committee (MPC) minutes from the Bank of England and it’s reasons for not adding further Quantitative Easing at the last meeting. Current thinking is that MPC members may have at least discussed a further £25billion of stimulus which, if proven correct, could put further pressure on an already beleaguered Pound.
Have a great day.