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Forex Market Outlook 10/31/11

This Halloween is turning out to be more trick than treat as the market digests the events of the past week, particularly the Euro debt resolution. This week is starting out in risk aversion mode with US dollar strength and stock market and commodities weakness.

One of the “tricks” from over the weekend was the unilateral currency intervention by the Ministry of Finance in Japan, who took action to weaken the Yen citing excessive speculation and one-sided moves that don’t reflect the underlying economic fundamentals. This has caused the Yen to fall some 4% vs. USD and is the third intervention this year undertaken by the Japanese. It must be noted, however, that this intervention was taken by the government itself and not the Bank of Japan.

So this week has started out with a bang in what is going to be a heavy week for economic data around the globe. A G-20 meeting, Central bank decisions, GDP figures, and employment numbers all can move markets so this week is likely to see some volatility which is great for the shorter-term traders. Let’s start with the highlights region by region from around the globe and discuss the potential data moving events taking place this week.

In Australia, tomorrow’s RBA rate policy decision will be significant if they lower rates by 25bp as some are expecting, though the overall consensus is still for no change. This means that the statement will likely be dovish as inflation concerns are less important than the global growth story. This announcement will be preceded by Chinese PMI manufacturing figures which may be more impactful as it gives a gauge of Chinese growth which ultimately is a proxy for the Australian economy.

In New Zealand, building permits plunged by some 17% although gains of 2% were expected and Wednesday’s unemployment rate is expected to improve to 6.4%.

In the Euro zone, there are still many questions to be answered with regard to the details of the resolution and now it looks like banks want to use accounting gimmicks to re-capitalize rather than raise private funding. CPI data came in slightly higher than expected, showing inflation at 3% vs. the 2.9% expectation. This is unlikely to impact Thursday’s rate decision, though the ECB may attempt to come off hawkish to prove they are sticking with their mandate. German retail sales figures came in lower than expected and their unemployment figures are due out on Wednesday.

The Pound is lower as home price figures came in lower than expected and tomorrow’s GDP figures are expected to showing slow growth, though it must be noted that the decline in government spending may be responsible. Various PMI figures are spread out along the week so these may be better barometers of the health of UK business and industry.

In Canada, GDP figures came in better than expected this morning, showing a YoY figure of 2.4% vs. the expectation of 2.2% with the quarterly figure higher by .1%. Raw materials and producer prices were also higher so there may be signs that inflation is starting to pick up. Friday’s employment report is expected to show 15K jobs added and the unemployment rate to remain steady at 7.1%.

And finally here in the US, this Friday’s NFP is expected to show a gain of 95K jobs and the unemployment rate to remain steady at 9.1%, though those estimates can change in the ensuing days. Wednesday’s FOMC meeting may be significant if Bernanke hints at further monetary easing or QE3. While corporate earnings have been good, unemployment has been stubbornly high and the Fed chief just can’t help himself and see the need to tinker with policy as if it makes a difference. At this point he is likely pushing on a string and money can’t get much cheaper—its up to fiscal policy now to determine the fate of the economy and whether or not confidence will be instilled.

The deficit super-committee is charged with finding an answer and at this point the prospects don’t look good. Add in a G-20 meeting this week which may show how much IMF involvement (read US taxpayer) is included in the Euro debt deal and we will see some volatility.

By Mike Conlon,

Market Snapshot