Currency Market Pause Between Major Events

February 26, 2013

Italian elections results sent all financial markets reeling yesterday, but incremental overnight movement in the dollar has been minimal.  It will take quite a while before political direction will be established in the euro area’s third largest economy, which places the prospects for reforms and continuing financial market calm in jeopardy.  In the meantime, investors look forward to other major events this week like

  • Fed Chairman Bernanke’s semi-annual Humphrey-Hawkins testimony today and tomorrow.
  • The revelation of Japanese Prime Minister Abe’s nominees for new Bank of Japan leadership, expected on Thursday.
  • Deep across-the-board U.S. spending cuts, known as the sequester, to begin Friday of a compromise alternative solution cannot be found.
  • A considerably number of end-of-month data releases later this week.

The dollar is unchanged against the euro and loonie.  The greenback recovered 0.2% against the Aussie dollar and yen overnight.  The yen had surged late Monday to as high as 90.85/USD and 118.70/EUR.  The dollar is 0.5% firmer relative to the kiwi and up 0.1% against sterling but shows a 0.1% dip against the Swiss franc and Chinese yuan.

Big declines have been posted in equities overnight, including losses of 2.3% in Japan’s Nikkei, 1.6% in India, 1.4% in the Philippines and China, 1.3% in Hong Kong, 1.1% in Singapore, and 1.0% in Australia.  In Europe, stocks in Italy have plummeted 4.6% so far.  Equities are down 2.9% in Spain, 2.2% in France, 1.8% in Germany and 1.4% in Britain.

The yields on ten-year German bunds and British gilts are down by eight and six basis points, respectively.  Japan’s 10-year JGB dipped below 0.70% for the first time since June 2003.

Gold rose 0.4% to $1592.80 per ounce on the resurgence of world risk aversion.  Oil fell by 0.8% to $92.37 per barrel.

The center-left forces headed by Bersani eked out an extremely narrow 29.55% to 29.18% win in Italy’s lower house of parliament, but Berlusconi’s people won 17 more upper-house seats than Bersani’s people, thus producing a stalemate.  The center-right, who just want to be obstructionist, are initially eschewing any overtures for a grand coalition or consent to hold a second election.  It may be that another apolitical technocratic-run government emerges, but it won’t happen quickly.  Not only does the election cast doubt over the future implementation of mandated reforms and other austerity in Italy, but the preservation of the Ezone’s cohesion and better global financial conditions also are now unclear.

There’s been an overnight focus on central banks.

  • Deputy Governor Debelle of the Reserve Bank of Australia indicated that currency intervention and/or another cut of the official cash rate are possible responses looking ahead, as the A-dollar remains strong and growth soft.
  • A variety of Bank of England officials (King, Bean, and Tucker) in testimony have noted the likelihood of inflation staying above the 2% target for some time longer but that more quantitative easing is possible.
  • Minutes from the last Swedish Riksbank Executive Board meeting were released, accentuating the weakness of growth and inflation and detailing reasons for two of six policymakers dissenting from a decision to keep the repo rate at 1.0%.
  • Lockhart of the Fed said overnight that the current very accommodative policy of bond buying can continue.  More importantly, two days of testimony begins at 15:00 GMT today when Chairman Bernanke goes before the Senate Banking Committee.  He will reprise his testimony Wednesday before the House Financial Services Committee.

Senate Majority Leader Harry Reid sees no sign so far of any compromise by Republicans to avert a spending Sequester on Friday.

Data released in Asia and Europe today were minimal.  Highlights include

  • A 1.7-point increase of Japanese small business sentiment, shown in the Shoko Chukin index, to a six-month high of 46.0.
  • A 9-point drop in the U.K. distributive trends index to a 5-month low of +8.  This index is reported monthly by the Confederation of British Industries.

Among other statistics reported earlier today, Swiss employment edged lower to 4.116 million last quarter from 4.122 million in 3Q12.  Finnish unemployment of 8.7% in January exceeded market expectations and the year-earlier level of 7.8%.  The Hungarian jobless rate averaged 11.2% in November-January versus 10.7% in the prior three months. Taiwan‘s jobless rate dipped marginally to 4.20% last month from 4.21% the month before.

Singapore industrial output was much weaker than projected in January, tumbling 9.1% on month and posting an unexpected on-year drop of 0.4%.  The Filipino trade deficit narrowed about 20% on month to $1.275 billion.  Export orders in Taiwan were 18% greater in January than a year before. 

GDP in South Africa expanded at a 2.1% annualized sequential rate in 4Q12 and was 2.5% greater than in the final quarter of 2011.  South Africa’s index of leading economic indicators edged 0.1% higher in December, but a livelier index of coincident indicators jumped by 1.5%.

New Zealand minimum wage is being raised 1.9%.  Expected New Zealand inflation over the coming two years has slipped to 2.17% as of a survey taken in the current quarter from 2.27% reported in the 4Q12 survey.

Spanish mortgage approvals were 26.2% smaller in December than at end-2011.

Several meaningful U.S. indicators will be reported today: the Case Shiller and FHFA house price indices, the Richmond Fed manufacturing index, new home sales, and weekly chain store sales.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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