In a move aimed at easing uncertainty and tension in the European markets, the US Federal Reserve, the European Central Bank and the Bank of England, along with the Central banks of Canada, Japan and Switzerland, decided to inject additional US dollar liquidity into the global financial system. It is hoped that this might ease funding pressures on European banks. China also gave a helping hand by cutting the reserve requirement for banks by 50 basis points, in a move to boost its economy. Although such moves may calm ‘Eurozone jitters’ in the short term, a long term solution still remains elusive. Investors will look for answers at the EU summit on December 9 in Brussels.
Meanwhile, the German Chancellor, Angela Merkel, has called for close political and economic co-operation among European leaders in order to calm markets.
Pound Sterling – UK Markets
The Pound is trading lower amid concerns that Britain has entered a second credit crunch. A spokesman for the UK Prime Minister stated that “there is a very serious situation in the financial markets at this time. We are experiencing a credit crunch and that central bank action is about trying to mitigate the effects of that credit crunch.”
Meanwhile, a leading think-tank, the Institute for Fiscal Studies, has stated that, Government plans to boost growth through building projects and business reform policies, "are really quite small", thereby dampening hopes that the Chancellor’s new Autumn statement initiatives would spur growth in the ailing economy.
In data just released, manufacturing Purchasing Managers’ Index (PMI) declined to a reading of 47.6 in November from 47.8 in October, indicating further contraction for manufacturing activity in the UK. We expect Sterling to continue to trade lower against the Euro in today’s session.
US Dollar – US Markets
Speculation of further easing for the US economy received a setback after data from Automatic Data Processing revealed a sharp increase in US private sector employment for November. The robust private payrolls data has fuelled speculation that the employment picture may prove to be a bit brighter than current market estimates.
Traders are expecting a positive surprise in the November jobs report, due tomorrow. Additionally, weekly jobless claims and ISM manufacturing data for November, both slated for release later today, are expected to indicate improvements in US economy.
We expect the US Dollar to take cues from the bond auctions in Eurozone and the US economic releases.
Euro – European Markets
The Euro has strengthened following the co-ordinated action by six central banks to lower the cost of dollar swap lines by 50 basis points, from 5 December 2011. The move by the central banks has bought some time for European policymakers to tackle the crisis; though traders do not view this action as a solution to the region’s fundamental debt problems.
Additionally, positive news flow from the region provided strength to the Euro. Germany’s Finance Minister, Wolfgang Schaeuble, indicated that Germany is open to extending the resources of the IMF via bilateral loans or increased special drawing rights. Greece’s Prime Minister, Lucas Papademos, promised to stick to the terms of a debt reduction deal and added that Greece needed to stay in the Euro.
All eyes will be on the Spanish and French bond auction due later today. We expect the Euro to trade taking cues from investor response to the bond auctions and other developments in the Eurozone.
Other Currencies – Highlights
The Aussie Dollar is trading sharply lower against its major counterparts amid growing speculation that the Reserve Bank of Australia will cut its benchmark rates when the policymakers meet on 6 December 2011.
Weak economic data from Australia has strengthened speculation for further rate cuts by the central bank. Data released earlier today by Australian Industry Group (AiG)- PwC revealed that manufacturing activity continued to contract in November. Moreover, building permits in Australia declined sharply in October and retail sales rose less-than-expected in October.
Data from Australia’s largest trading partner, China, have not been encouraging. China’s manufacturing PMI fell to 49 in November from a reading of 50.4 in October, lower than market estimates.
The Aussie Dollar is expected to trade weaker against the USD and Euro in today’s session.
Fed's Dot Plot Shows No Rate Hike in 2019, Dollar Weakens Sharply