The Calm before the Storm

With just a few trading sessions left in the year market concerns over the liquidity situation in the Eurozone have grown, following the higher-than-expected demand for loans provided by the ECB yesterday. Traders are looking towards next week’s French and Italian debt auctions for cues to market direction, amid the looming threat of credit ratings downgrades. The second revisions to the third quarter US and UK GDP data slated for today, are unlikely to have a meaningful impact on the markets. We expect light volume in quiet trading today, ahead of the holiday season.

Pound Sterling – UK Markets

The Pound is trading lower against the Euro this morning. The BoE minutes released yesterday revealed that all policymakers agreed that there was no need to change the path of asset purchases at this meeting. Sentiment surrounding data released yesterday remained mixed, as public sector net borrowing in Britain declined more-than-expected in November, placing the government on course to hit the deficit target. However, a record high level of net debt has intensified fears over potential action by rating agencies. On the economic front, the release of the second revision for the third quarter GDP showed that the UK economy grew by 0.6% between July and September. However this optimism is set to be offset by news that the current account deficit is anticipated to widen in the third quarter. We anticipate Sterling trading to move in tandem with the events unfolding in the Eurozone.

US Dollar – US Markets

The US Dollar has weakened against the Euro, as risk appetite among investors improved, following a firm start to European equity markets. Meanwhile, Fitch has warned that the rising US debt burden is detrimental to its “AAA” credit rating. The agency further added that the absence of a credible deficit reduction plan may result in their sovereign rating being lowered by the end of 2013. A tepid response to the outcome of the ECB refinancing operations, coupled with robust US existing home sales data for November, had led the US Dollar higher against the majors yesterday. A heavy economic calendar today featuring the final revision to the third quarter GDP, Reuters/Michigan Consumer Confidence Index and initial jobless claims, is likely to provide direction to the US Dollar in today’s trade.

Euro – European Markets

The Euro has strengthened against the majors this morning. However, the ECB’s move to provide €489 billion in three year long-term loans offered little respite to markets. Initial optimism over the outcome of the bank lending programme petered out as traders turned skeptical over the liquidity situation in the European financial system. Today’s notable event in Europe is the Italian Senate’s final approval to Prime Minister, Mario Monti’s €30 billion emergency budget plan. With a relatively light economic calendar today, investors remain focused on the outcome of the Italian and French bill auctions slated for next week. We expect the Euro to take further cues from the ECB President, Mario Draghi’s speech scheduled for later today.

Other Currencies – Highlights

The Kiwi Dollar has moved higher against the majors this morning, following better-than-expected GDP data for the third quarter. However, the figures are unlikely to impact the country’s monetary policy, as growth was largely fuelled by the Rugby World Cup, held in the country between July and October, rather than fundamental factors. A positive start to European equity markets has further consolidated gains for the Kiwi Dollar against the US Dollar and the Yen. We expect the upbeat trading sentiment in the Kiwi to continue as data scheduled for release later today is expected to point towards further strengthening of the US economy.