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· UK Preliminary third qtr GDP number beats the expectation of +.4% , coming out at +.7%
· Australian CPI weaker than expected at +.6% for the qtr vs expected +.7%
· Japanese Industrial output and Manufacturing numbers weak
· Weaker German Retail Sales and Consumer Sentiment numbers
· US GDP rise 2% in third qtr versus an expectation of 2.1%
Market Overview:Price action last week was particularly choppy in nature. The focus was almost entirely on the USD, and how it will be effected by this week’s US Federal Reserve announcement of the details on their second round of Quantitative Easing (QE -effectively the printing of money, by lowering longer term interest rates, through the issuing of US Government Debt or Bonds). The difference of opinion is now not between whether this increased program will occur, but purely centered on the extent and timing of it. The larger the program (the more Government money pumped into the US system), the weaker the USD will be. Most observers do not expect a “shock and awe” approach as occurred in round one, but rather a more measured approach. There are wide variations on the amount of QE involved, but any amount larger than 500billion in a short time frame would be considered aggressive. The FOMC statement is released 2.15pm Wednesday EST.
Interestingly, after the UK preliminary GDP number was released last week showing a .7% jump in growth for the qtr, against the market expectation of .4% , the chances of further QE in the UK have been greatly reduced. As the market has moved to price out this second round of QE, the GBP has found good support, and as a result has outperformed most currencies since the release.
The AUD has been under a little pressure since the release of its CPI number last Wednesday, that came out lower than expected at .6% (.7% expected). This takes a little pressure off the RBA to hike its cash rates as aggressively as the market had anticipated. With the reduction in the level of cash rate expectation, the AUD weakened against almost all currencies to varying degrees.
The RBNZ issued a brief statement with its unchanged cash rate at its review last Thursday. The accompanying statement was reasonably benign, but the NZD appreciated a little afterwards as some market participants had to buy NZD to cover sold positions they had instigated in anticipation of a statement pointing towards a lower cash rate track in the future.
In Japan there was further evidence of weakness in the economy in the data released, and especially manufacturing numbers adding to the gloomy outlook. The strength of the Yen against the USD will be contributing to the malaise. Interestingly both Brazil and Japan have signaled they may still further intervene to curb strength their respective currencies through various means. These comments are in the face of the G20 initiatives underway, and will no doubt be a talking point at the upcoming G20 summit.
The spluttering growth outlook for the Euro zone continued, with both lower Retail Sales and Consumer Sentiment in Germany. The re-emergence of the problems in the Govt. Debt markets was topical again, and no doubt weighed a little on the single currency also.