In the aftermath of Cameron’s veto

Last week’s EU summit resulted in the adoption of new fiscal rules aimed at restricting the zone’s annual structural deficit to 0.5% of nominal GDP and an automatic correction mechanism to coverany deviation. While 26 out of the 27 EU member states agreed on a “fiscal compact”, Britain decided to opt out. Prime Minister, David Cameron, vetoed the EU proposals after he failed to secure safeguardswhich, he claimed, were vital for the health of London’s financial sector. While the EU measures were focused on enhancing fiscal discipline and strengthening economic policy co-ordination, an immediate action plan to address the burgeoning debt crisis still remains elusive. Markets will keep a watch on bytes from credit ratings agencies, with speculation of credit downgrades for some EU countries still looming large. The spotlight will remain on Eurozone sovereign debt markets this week with several countries scheduled to hold bond auctions.

Pound Sterling – UK Markets

The Pound is trading weaker against the US Dollar, amid concerns over the health of the British economy. There are fears that the UK economy has already begun to shrink, with rising unemployment and household spending expected to hamper growth prospects. Key events lined up during the week are expected to decide the movement of Sterling. Markets are expected to closely monitor inflation data slated for release tomorrow, with a lower reading predicted for November. This week’s jobless claims data is expected to indicate a rise, further compounding last month’s gloomy labour market figures. Falling inflation and rising unemployment are likely to support a case for additional quantitative easing in 2012. Focus will also be on retail sales data this Thursday as a gauge of the impact of the slowdown on British consumers.

US Dollar – US Markets

The US Dollar is trading higher against the majors this morning on higher risk aversion, ahead of the outcome of Italian and French bond auction. Traders are keenly looking to gauge the risk appetite of market participants toward the sovereign debt of major Eurozone economies. Furthermore, the US Dollar has been a major beneficiary of capital outflows from South East Asia, owing to the recent slowdown in the region’s growth. With only the budget statement for November on tap today, traders will closely monitor retail sales data due for release tomorrow. Positive retail sales data is expected to further dent the prospect of additional stimulus, especially after last week’s robust weekly jobless claims and consumer sentiment. The US Federal Reserve, in its monetary policy meeting tomorrow, is expected to maintain its benchmark interest rate in a range of 0% to 0.25%. We expect risk aversion to continue and drive the US Dollar higher against the Pound and the Euro in the day ahead.

Euro – European Markets

The Euro has weakened against the US Dollar and Sterling ahead of Italian and French bond auctions due later today. Italy is expected to sell €7 billion of 365 day bills, while France is scheduled to auction €6.5 billion of short-term debt. Last week’s crucial EU summit led to an agreement among European leaders over tighter budget rules and expansion of the bailout fund. However, concerns over possible ratings downgrades persist after Moody’s stated that the summit offered few new measures which, in turn, did not satisfactorily diminish the risk of credit ranking revisions. Moody's also indicated that it intends to revisit the ratings of all European Union countries during the first quarter of 2012. Market focus this week will undoubtedly be on debt auctions in several Eurozone countries and German investor confidence index due tomorrow, which is expected to drop to a three year low for December.

Other Currencies – Highlights

The Kiwi Dollar has weakened against the majors after the New Zealand Institute of Economic Research (NZIER) cut the nation’s growth outlook. The agency indicated that New Zealand’s GDP is expected to grow 2.2% and 3.0% for the year ending March 2012 and March 2013, respectively, lower than the earlier growth estimate of 2.6% for 2011-12 and 3.7% for 2012-13. NZIER further added that a darkening economic outlook and delays in Canterbury’s post earthquake reconstruction will have a negative impact on this year’s growth potential. Additionally, a weak start to European equity markets and uncertainty surrounding the bond auctions in Italy and France, have dampened trading sentiment towards the Kiwi Dollar.