Illiquid Conditions Expected Amid U.S. Holiday; U.S. Debt Deadline Ahead

After the U.S. Dollar’s bull-run moderated during the second week of November, this past week’s price action showed that market participants continue to shed riskier assets for safer, more liquid exposure. The world’s reserve currency’s strength is particularly interesting, as there were not any majorly negative developments out of Europe. As such, the Greenback looks poised for further strength, on a fundamental basis. In terms of market psychology, the drop this week by equity markets was a slow meltdown – important because the higher than average volume figures coupled with a lack of panic selling suggests there is some way to fall.

With that said, in terms of scheduled event risk, the docket is lighter than last week, as a Federal holiday on Thursday has the U.S. markets closed. Although markets reopen Friday, the holiday coupled with end of week seasonality trends suggest that participation rates will be exceptionally low overall. Nevertheless, these expected conditions do not mean there aren’t significant events on the docket. American, British and German growth figures are due between Tuesday and Thursday; all are key for determining how much more easing each of their respective central banks will introduce to markets. The most important event on the week comes on Wednesday, when the Joint Select Committee on Deficit Reduction faces its deadline. If there are not sustainable spending cuts set forth, the United States could be facing another debt downgrade within the next week.

USD Federal Reserve Releases Minutes from Nov. 1-2 FOMC Meeting: November 22 – 19:00 GMT

At its meeting culminating on November 2, the Federal Open Market Committee decided to maintain its key benchmark interest rate unchanged at 0.00 to 0.25 percent. Likewise, no changes were made to the Federal Reserve’s balance sheet, which had experienced a ‘twist’ after the September meeting. As per the FOMC’s statement, data “indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.” On inflation: “Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.” As such, market participants will look towards the rhetoric employed in the minutes, as Charles Evans, a notable dove, voted against the FOMC monetary policy action, as he “supported additional policy accommodation at this time.”

GBP Bank of England Minutes: November 23 – 09:30 GMT

On November 10, the Bank of England voted to maintain the key interest rate at 0.5 percent. Additionally, the Monetary Policy Committee held the target of its bond program at £275 billion. The country’s inflation rate jumped to 5.2 percentin September, although the rate has since subsided to 5.0 percent in October (this data was not available at the time of the rate decision). Regardless, the Bank of England looks unlikely to raise rates despite price pressures persisting at more than double its target of 2 percent.Despite the high rate, policymakers at the Bank of England agree that the economic outlook is not stable enough to withstand higher interest rates. The minutes of the meeting will be published on November 23 and will include highlights of the board meeting as well as forecasts of future growth for the country. The key information will be the Bank of England’s decision in regards to expanding its asset purchase program.

USD Durable Goods Orders (OCT): November 23 – 13:30 GMT

Although the U.S. GDP revision is important, considering it is unexpected to show any change, the durable goods figure for October has the potential to be more market moving. The early revision for the September figure shows that orders did not contract as much as previously thought, now at -0.6 percent versus the -0.8 percent figure originally reported. Still, that has had little influence on the forecast for October. According to a Bloomberg News survey, orders are expected to have contracted by 1.2 percent; June was the last time there was a contraction of 1.0 percent or greater. As a proxy to consumer spending on goods with a lifetime of three years or more, the report is often seen as a gauge of future manufacturing production. Accordingly, a negative print as expected or worse will weigh on risk-sentiment and boost the U.S. Dollar.

USD Joint Select Committee on Deficit Reduction Deadline: November 23 – 23:59 GMT

The Joint Select Committee on Deficit Reduction is a 12-member panel of both Democrats and Republicans, borne out of the debt deal reached in July to prevent the United States from defaulting on its obligations. As per the agreement reached between Democratic President Barack Obama and Republican Congressional leaders, the 12-member panel would find $1.2 trillion in deficit reduction over 10 years by November 23. Should no plan come together, $1.2 trillion in “trigger cuts” would occur, and the United States would very likely face another downgrade by one of the major rating agencies in the coming week(s). Considering the state of global affairs – the Euro-zone sovereign debt crisis, emerging markets showing signs of slowing down and rising geopolitical tensions in the Middle East – failure to reach an agreement by Wednesday could catapult markets back into a state of flux similar to what was seen in late-July / early-August.

EUR German Gross Domestic Product (YoY) (3Q F): November 24 – 07:00 GMT

The most important growth reading of the week, the second print of the German third quarter gross domestic product reading is unlikely to stir markets. Still, it remains an important piece of data to keep an eye on as German remains the growth engine for the Euro-zone; without German, the common market would be in a recession. The first reading showed that growth came in at 2.6 percent, year-over-year, and 0.5 percent on a quarterly-basis. These readings are unexpected to change as per the release on Thursday, but as new data comes in, expect German growth to slow steadily throughout the fourth quarter. With an upward revision unlikely, a downward revision would provoke volatility across Euro-based pairs.

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--- Written by Christopher Vecchio, Currency Analyst

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