Global Growth Remains on the Starting Line

The IMF yesterday reaffirmed that global economic conditions remain fragile and urged policymakers in the Eurozone and the US to take steps in the right direction to prevent a further global slump. The agency expects the global economy to grow this year at its slowest pace since 2009, with China clocking a sub-8% growth. Meanwhile, Eurozone finance ministers made the region’s permanent rescue fund functional in their meeting yesterday. However, they rejected the prospect of a near-term Spanish bailout. Today’s industrial production and trade balance figures indicated that the British economy is still not out of the woods, in line with the IMF’s downgrade of UK economic growth.

Pound Sterling – UK Markets

The Pound retreated against both the US Dollar and the Euro in yesterday’s trading session, as growth worries in the UK re-emerged. The British Chancellor offered no hints of a change to his current stance, as he indicated that Conservatives would slash government spending on welfare by £10 billion if re-elected. However, the IMF urged the UK to abandon its spending cuts if growth disappoints. Sterling continued to hover close to yesterday’s lows against the majors this morning, after data revealed that industrial production continued to contract while trade deficit widened for August. Adding to the woes, the IMF indicated that it expects the UK economy to shrink by 0.4% this year, compared to its earlier estimate of a 0.2% growth. On the flip side, the retail sector in the UK continued to send strong signals of recovery after the BRC indicated that retail sales grew at the fastest pace so far in 2012. Despite the gloomy forecast by the IMF, the OECD’s leading indicators suggest that the British economy is picking up. The NIESR’s GDP estimate due later today is expected to provide more clarity surrounding UK growth prospects.

US Dollar – US Markets

In yesterday’s trading session, the greenback moved higher against its major peers as traders trod cautiously, with third quarter earnings expected to garner attention in the coming weeks. Moreover, Eurozone finance ministers indicated that Spain would not require a bailout in the near future. The IMF has continued to hamper risk appetite with a flurry of downgrades and prompted traders to seek shelter in the US Dollar this morning. The agency lowered its global growth forecast to 3.3% and expects China to record less than 8% growth for 2012. However, gains in the greenback were limited amid hopes that People’s Bank of China would join other global central banks in providing fresh easing measures. Today’s session sees the release of the small business and economic optimism data from the US and is likely to have minimal impact on the US Dollar.

Euro – European Markets

The Euro slipped marginally against the greenback yesterday, as Eurozone finance ministers squashed hopes of an immediate bailout for the Spanish economy. However, policymakers commissioned the Eurozone’s permanent rescue fund, which was assigned a “Aaa” rating by Moody’s. Meanwhile, Greece’s creditors have set an 18 October 2012 deadline in order to pass the recommended reforms, in exchange for fresh financial assistance. The German Chancellor’s visit to Greece later today is expected to offer some clarity on this front. The common currency is trading below the 1.30 mark against the US Dollar this morning after the IMF, in its latest forecast, highlighted that peripheral Eurozone nations would continue to hinder global growth prospects. The agency expects recessionary trends in Italy and Spain to continue and also indicated that Germany might show signs of buckling under pressure. Yesterday’s weak Eurozone investor sentiment data highlighted that markets remained wary of growth prospects in the Eurozone. With little on offer in terms of macro releases today, markets are likely to ponder the IMF’s flurry of downgrades.

Other Currencies – Highlights

The New Zealand Dollar has limited its decline against the majors and is trading almost flat against the US Dollar in today’s session, on the back of a positive set of economic data from the island nation. Data revealed that business conditions in New Zealand recovered sharply in the third quarter and house prices continued to climb at a steady pace for September. The IMF, in its World Economic Outlook report, marginally lowered its 2013 growth forecast for the New Zealand economy, but maintained that the Kiwi economy is still on track to grow over 3%. However, the New Zealand Institute of Economic Research differed in their view and predicted annual economic growth to slow to 1.5% in the second half of the year from 2.6% at the end of June 2012. Apart from developments in the Eurozone and the US, manufacturing and consumer confidence data from New Zealand this week holds significance in determining the direction of the Kiwi Dollar against the majors.