[B]Talking Points
• Japanese Yen: Industrial production rises to record on Chinese, European demand
• Australian Dollar: Business investment falls the most in nearly eight years
• Euro: Euro-zone retailers suffer despite improvements in German labor market
• British Pound: Mortgage approvals falter on tight BOE monetary policy
• US Dollar: Strong US Q3 GDP revisions expected, new home sales to weaken further[/B]
The US Dollar recovered nearly all of yesterday’s losses against the Euro and British Pound, shrugging off yesterday’s Beige Book report and dovish commentary from Fed Vice Chairman Kohn and looking ahead to this morning’s US Q3 GDP revisions. The British Pound was also weighed down by remarks from the Bank of England’s uber-dove David Blanchflower, who was one of the dissenters in favor of a cut at the November MPC meeting. Indeed, Blanchflower made clear his intent to vote for a decrease again in December as he said that rates should “come down now so we get ahead of the curve.” Meanwhile, the Japanese Yen was mixed against the majors as stronger-than-expected Japanese economic data provided a bid for the low-yielding currency while solid gains in Asian equities overnight supported the case for carry trade gains.
Taking a deeper look at the economic news, industrial production in Japan rose 1.6 percent to a record in October to meet demand from China and Europe, indicating that a slowdown in the US will not hinder growth in the Japanese economy. However, the data also highlights how critical exports are to expansion in the nation, as falling wages and rising unemployment do little to stoke already-tepid consumption. However, as we mentioned yesterday, “With inflation unlikely to stem from wage increases or price hikes on consumer goods, there is little impetus for the central bank to increase rates any time soon, and as a result, FX carry trades like USD/JPY and GBP/JPY will likely remain broadly driven by risk aversion trends.”
In Europe, German labor market conditions improved more than expected in November, as the number of people claiming unemployment plummeted by 53,000 - the sharpest drop in 8 months - which brought the unemployment rate down to 8.6 percent, the lowest since April 1993. With recent German CPI readings showing that inflation is spiraling higher to the tune of 3.0 percent year-over-year, the European Central Bank faces a difficult scenario as the instability of the financial markets and the downside risks to growth it presents also warrant attention. Signs are slowly emerging that the Euro-zone economy may be in for a slowdown, as consumer confidence has started to wane. Retailers are already feeling the impact, as Euro-zone retail PMI fell for the third consecutive month to 45.9 in November, signaling that the majority of purchasing managers are feeling pessimistic. A breakdown of the index shows that gross margins continue to fall as businesses are not able to pass through higher costs to customers. Meanwhile, inventories jumped, but whether this is a good sign (companies are building supplies to meet expected demand) or a bad sign (supplies are rising due to lack of demand) remains to be seen. Unfortunately, it may be the latter as sales versus a year ago declined to an index reading of 47.9 from 48.1. Nevertheless, when it comes to the December ECB meeting, Trichet is unlikely to ignore his price stability mandate and as a result, the bank will likely keep rates steady at 4.00 percent and maintain a hawkish bias.
Looking ahead to this morning’s US data, Q3 GDP is expected to be revised higher as a result of stronger-than-expected export growth in September. However, personal consumption is anticipated to be revised lower, and if this figure proves to be particularly disappointing, the dollar could go back to its losing ways as sentiment on spending is already dismal ahead of the holiday shopping season.
