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Significant Data out of Asia and Europe Overshadow Sparse U.S. Releases

Significant Data out of Asia and Europe Overshadow Sparse U.S. Releases

2011-10-10 04:00:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The trend continues. After an another extraordinarily choppy week – this time the front end gave way to the continued shift to risk-aversion while the second half of the week marked a correction across risk-correlated assets – the week ahead looks to offer little relief to such price action. This is considerable in the sense that there were many significant data releases the first week of October (and the quarter), but none seemed to resonate that favorably with market participants: the Reserve Bank of Australia noted continued pressure on the economy due to global strains; the Bank of England expanded its asset purchase program by more-than-expected, while Governor Mervyn King warned that the coming financial crisis could be the worst “ever”; the European Central Bank was forced to reopen loans to banks to ensure liquidity; and U.S. nonfarm payrolls data surprised to the upside, but markets soon reversed by the end of the day.

Looking ahead, it’s important to note some significant developments that occurred on Friday specifically. Indeed, markets reversed their winning streak that began late Tuesday, with the S&P 500 gaining nearly 3 percent in the last 45-minutes of trading after touching 2011 lows earlier in the session. This appears to have amounted to nothing more than a short-covering rally predicated on news that European leaders were going to work more diligently to stop the debt crisis, a worrying sign considering the fact that after months of austerity measures, European Troika commissions, loans, and summits, markets are now expected to believe that things will improve after the efforts put forward thus far.

In regards to Friday, the price action that unfolded was a very telling sign, I believe. Risk-correlated assets were slammed after the last nonfarm payrolls report, when the U.S. economy added zero jobs in August, a worse-than-expected print. Thus, when the reading for September far exceeded expectations, and risk-correlated assets (most notably the Australian Dollar and the Canadian Dollar) rallied, it appeared fears of a recession in the United States were easing. However, the turning point came halfway through the North American session, when Fitch Ratings announced that it would cut the Italian debt rating by one notch and the Spanish debt rating by two notches.

In spite of the earlier promising data out of the United States, markets fell for the remainder of the day, save a brief rally that was soon erased headed into the close, with U.S. equity markets finishing the day lower. Similarly, the U.S. Dollar had gained back most if not all of its losses following the nonfarm payrolls report. This highlights an important development of market psychology: participants are trading headline to headline, or based on fear.

That being said, while there are significant data prints on tap for the coming week, given how fragile market sentiment is at the current moment, high yielding and risk-correlated assets, such as the Aussie and the Loonie, as well as the Euro, need the data to meet or beat expectations, as markets look close to another major drop.

China New Yuan Loans (SEP): October 11 – --:-- GMT

According to a Bloomberg News survey, economists expect new loans in China to increase to 550.0 billion for the month of September from 548.5 billion in August. While an increase in lending is generally an indication that economic growth is could be expanding, the People’s Bank of China has initiated a series of rate hikes over the past 12-months to try and stem further credit growth. A worse-than-expected reading is of particular importance, as the figure will be interpreted as a proxy for emerging markets growth; a reduced size of loans suggests growth is contraction. If the data falls in line or better-than-expected, look for risk-correlated assets, in particular the Aussie, to appreciate against lower yielding currencies, in particular the Japanese Yen.

United Kingdom Jobless Claims Change (SEP): October 12 – 08:30 GMT

The British labor is forecasted to have slightly deteriorated during the last month of the third quarter, with jobless claims forecasted to have increased by 24.0K in the month of September. This is another blow to the labor market, which has seen claims hold above 20K since May. Likewise, the claimant count rate is forecasted to rise to 5.0 percent from 4.9 percent in August, according to a Bloomberg News survey. Similarly, the unemployment rate is expected to have risen to 8.0 percent in August. The softening labor market underscores that need for the Bank of England to expand measures, which it did at its meeting on Thursday. With that said, in hand with deteriorating industrial and manufacturing data, it appears that the British economy is headed for stagflation, an economic condition that will weigh on the Sterling over the next several months. Join a DailyFX analyst for live coverage of event!

Australia Employment Change and Unemployment Rate (SEP): October 13 – 00:30 GMT

The Australian economy is forecasted to have added jobs in the month of September, with a Bloomberg News survey showing an increase of 10.0K jobs. This would negate August’s drop of 9.7K. However, of recent, economic indicators have been deteriorating for Australia; with confidence in the direction the economy is heading dropping. It should be noted that the past release saw a significant miss on the print, with the forecast showing an improvement in labor market conditions. The Australian economy has come under so much pressure recently, mainly due to the fact that a global slowdown would dampen demand for the mining sector, that the Aussie dipped below parity against the U.S. Dollar. A strong print could alleviate some of that recent pressure and boost the Aussie back above the 1.0000 exchange rate versus the Greenback. Join a DailyFX analyst for live coverage of event!

United States Advance Retail Sales (SEP): October 14 – 12:30 GMT

Consumer demand is expected to have reboundedin September, as a Bloomberg News survey shows that the median estimate for advance retail salescomes in at 0.7 percent, much improved over the 0.0 percent rate in August. Retail sales are expected to remain strong across the less volatile ex food, energy and auto prints, with 0.3 percent gains forecasted. A recovery in consumer demand is an important part of the U.S. recovery, as little growth in the labor market – September’s labor market reading showed that the unemployment rate held at 9.1 percent – has put increasing pressure on higher yielding assets as market participants seek safe havens, such as the Japanese Yen and the U.S. Dollar. Consumer demand is also important for U.S. growth, as it comprises nearly 70 percent of the aggregate GDP figure. That being said, the advance retail sales figure is the most import data release for the United States this coming week.

United States U. of Michigan Consumer Confidence (OCT P): October 14 – 13:55 GMT

Consumer confidence in the United States is forecasted to improve slightly in October’s preliminary reading, after rebounding in September back to 59.4. September’s reading remained below the key 60.0 level, last having been above said level in July at 63.7. Part of the reason that confidence may show a slight rebound is that oil has recently come down from above $100 per barrel, a seemingly psychologically significant area for American consumers. Nonetheless, the rebound in confidence may be short-lived, as increased market volatility has erased trillions of value off of equity markets, and further political divisions over how to reduce America’s expanding debt burden have arisen once more. Join a DailyFX analyst for live coverage of event!

Rate Hike Probabilities / Basis Point Expectations (12-months)

Significant_Data_out_of_Asia_and_Europe_Overshadow_Sparse_U.S._Releases_body_Picture_1.png, Significant Data out of Asia and Europe Overshadow Sparse U.S. Releases

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow me on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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