Fundamental Headlines
• Oil Abundance in Canada Provokes Anxiety – Bloomberg
• Supercommittee Failure Poses Threat to U.S. Recovery – Bloomberg
• In Europe’s Middle, Life Gets Tougher – Reuters
• No Respite for Spain on Markets despite Election Result – Reuters
• EU Warns Greece on Bailout – WSJ
European Session Summary
After yesterday’s sell-off ahead of the announcement that the Congressional Joint Select Committee would not overcome its impasse, Asian and European market traded relatively unchanged. The ‘Supercommittee’s’ failure to find sustainable spending cuts and new sources of revenue immediately evokes concern about future growth prospects; government spending contributes a significant portion of the overall U.S. growth figure. Nonetheless, with few developments out of the Euro-zone, there was little need for panic, and European equity markets were slightly higher ahead of the New York session.
EUR/USD 1-minute Chart: November 22, 2011
Charts created using Strategy Trader– Prepared by Christopher Vecchio
In terms of the Euro’s performance in the overnight, it was one of the best performing currencies ahead of the North American data releases on Tuesday. Trading at 1.3530 ahead of the U.S. third quarter gross domestic product release, it appeared that the Euro exodus had slowed for the time being, with the common currency holding up the past few days even as other higher yielding currencies and risk-correlated assets were dumped. With market liquidity thinning out for the Federal holiday in the United States on Thursday, it appears selling pressure will be on hold until next week.
Taking a quick look at credit markets, French, Italian and Spanish bonds continued to show signs of distress on Tuesday after a disappointing Spanish bond auction. The Spanish 2-year Notes’ yields climbed to their highest rate since 2000, as investors have seemingly dismissed the new government as being capable of fixing the country’s problems, especially in the near-term: three-month bills yielded an average of 5.11 percent, more than double the 2.292 percent yield at the previous auction on October 25.
Overall, it appears that the European Central Bank may have been quietly intervening in the bond markets, as the Italian 10-year Note’s yield fell almost as soon as trading opened on Tuesday. At the time this report was written, the Italian 10-year Note had fallen to a 6.715 percent yield, just above the Spanish 10-year Note, which was trading at a 6.560 percent yield. These bonds appear poised to push above the key 7 percent threshold for good in the coming weeks.
Pre-North American Data Summary
Ahead of trading in New York, the United States’ third quarter GDP revision was released, and the results were less-than-satisfactory. On the heels of vastly reduced inventories – a sign that companies are expecting lower demand in the future – the third quarter growth figure was revised down to 2.0 percent from the originally reported 2.5 percent.
The components of the release suggest that growth has peaked before another recession. As noted in this column, the spending figures set forth were unsustainable for consumer-led growth in the coming periods: the savings rate dropped to 4.1 percent in the third quarter, while consumer spending jumped to 2.4 percent and income adjusted for inflation fell by 1.7 percent. With the labor market remaining stagnant and companies pricing in a recession – evidenced by producing less goods, hence falling inventories – quantitative easing will rise once again as a possible solution.
USD/CAD 1-minute Chart: November 22, 2011
Charts created using Strategy Trader– Prepared by Christopher Vecchio
Price action developed as expected following the release, with the safe haven currencies gaining across the board after the release. The U.S. Dollar quickly rose towards top performer, gaining the most against the Canadian Dollar in the minutes following the revision. Within 30-minutes after the release, the U.S. Dollar’s advance had been rebuked, but on what? It is my belief that the worse-than-expected print will stir chatter for a third round of quantitative easing, thus boosting risk-appetite. With the Federal Reserve minutes due out later today, this topic will be addressed shortly.
24-Hour Price Action
Key Levels: 12:45 GMT
Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is higher, trading at 9938.01, at the time this report was written, after opening at 9913.18. The index has traded mostly higher, with the high at 9946.39 and the low at 9889.20.
--- Written by Christopher Vecchio, Currency Analyst
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.
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