We are looking into a potentially interesting week for risk coming up as global growth concerns and central bank action are and will remain the key FX drivers.

However, the main story remains firmly in European quarters, with the collapse of the ruling coalition in Holland as well as Hollande’s win in the first round of the French presidential election adding to concerns about the fiscal outlook in the eurozone. Worryingly, the collapse of the Dutch coalition follows a round of failed negotiations on the fiscal measures to meet the 2013 budget targets while over in France, Francois Hollande reiterated over the weekend his intention to renegotiate the fiscal compact and shift its policies towards growth at the expense of fiscal austerity. These are not good market news by any stretch as any softening on fiscal commitment by any European sovereign will only mean higher yields and thus further funding issues. And thus the vicious cycle continues.

In data terms, this week we already had the Eurozone PMIs for Apr, with France, Germany and the whole Eurozone printing lower that expected numbers adding to the growth concern story. March retail sales data for Spain, Ireland and Italy will follow on Friday Friday and the rest of the euro zone early next week.

On the US side, we get the FOMC meeting this week, where it is expected that Bernanke will likely indicate at the press conference on Wednesday that the Fed is keeping its options open when it comes to more monetary accommodation going forward. Any upgrade of their forecasts could provide some cyclical support for the dollar if combined with upside surprises from the upcoming US GDP and Core PCE data (on Friday) and thus pushing EURUSD back to the bottom of its recent 1.3000-1.3500 trading range.

On these shores, the UK will publish the first Q1 GDP estimate within the G10 when it publishes on Wednesday. Analysts’ expectations are mixed, although recent BoE comments and GBP strength suggest that markets may be leaning towards a stronger reading than the 0.1% QoQ median of the Bloomberg survey, leaving considerable GBP vulnerability to a negative print

Happy trading,

The WM team

Data has been mixed, with US consumer confidence dipping in March albeit not as much as expected while US house prices also did not drop by as much as anticipated. However, the year’s second quarter has kicked off strongly with a higher than expected Chinese PMI figure of 53.1 , which is at a 12 month high. Overnight equities continue to grind higher and the USD has tried to break through recent lows across the majors. Looking forward to the week, there is a decent amount of Central bank meetings with RBA tomorrow (10bp easing priced in), ECB on Wednesday and BOE on Thursday with no change expected from either, but perhaps more quantitative easing on the MPC side (from the current level of £325bn).

Overall, we feel that the weak USD bias is finding ever increasing resistance as it is based on – perhaps unrealistic – expectations that the Fed will still implement more quantitative easing. Indeed, while further Fed easing is possible it may not need to involve an expansion of the Fed’s balance sheet. Moreover, a key reemerging theme has been the European sovereign crisis, this time out with a Latin flavor courtesy of Italian and Spanish spreads that are on the rise again. This is potentially hurtful to the EUR and global risk appetite especially given the buoyant conditions of recent weeks.

Another interesting pair, EUR/CHF remains pinned to the 1.20+ ‘line in the sand’ imposed by the Swiss National Bank while the CHF has strengthened over recent weeks against the USD. Economic data has deteriorated over recent months, but it hasn’t really pushed CHF lower yet, in part perhaps as market positioning in CHF is already on a permanent negative bias with many playing the waiting game (of being long EURCHF) secure enough in the knowledge of the floor at 1.2000. Eventually as risk appetite improves and the US yield advantage widens against Switzerland, both EUR/CHF and USD/CHF should be moving higher effect that may lead the SNB
to raise the floor.

AUD/USD is another pair worth highlighting. A combination of weaker Chinese economic data, Australian yields having fallen more than US ones, and deteriorating medium term position from “perma-longs” to somewhat short term short or neutral have led to a steady drop from February’s highs of 1.0850 to last week’s lows of 1.0330. High yielder currency correlations have also fallen in AUD terms, confirming perhaps independent weakness away from the “risk on/off” game. We feel any late comers  to the short AUD party should be very cautious, whilst there is perhaps the first  decent technical opportunity in weeks to go long in the low 1.30s with a 1-2 week target of 1.0650-1.0700.

Happy trading,

The WM team

On a generic macro level, we have been getting global data over the past couple of weeks coming in less positive than before, in other
words there are fewer positive surprise data factors helping to boost risk. It is when these positive surprises cease, that we tend to see the first
significant risk off days as evidenced clearly last week.

On top of this, Bernanke significantly changed the expectations landscape last week potentially signifying less aggressive accommodation by the
Fed, fact that could spill over to other central banks. The Fed appeared less committed to further aggressive accommodation given that the US data remains acceptable. While the impact of the perceived Fed ‘hawkishness’ on risk appetite should have been mitigated by the second bout of 3y LTRO last week, some of the positive impact of the ECB liquidity measures seemed to be priced in well in advance. From that point of view, it also didn’t help that various euro zone officials and policy makers were quick to call for no more LTRO
operations.

The market is taking this seriously enough by taking stock and in many cases trimming on long risk positions across assets (but not
equities – yet). This has arguably been evident in the EURUSD retracement from its recent 1.3485 highs, but has yet to be seen in equities. Any two day retracement of, say, the S&P 500 would confirm a significant risk appetite change. With Greece and the debt take up outcome (this Thursday) once again dominating the horizon as well as Chinese PMIs coming at their lowest levels in a year and growth targets being downgraded, we see a very real possibility that the market will continue trimming risk and being cautious leading potentially to a sub 1.3000 Eur/Usd retest in the coming sessions.

Upcoming data for the week:

Last week’s price action was dominated by better macro data across the globe. PMI data came out better than expected in
virtually every country with the exception of Switzerland. An upside surprise of US labour market data towards the end of the week added to the positive macro news as did the UK PMI, which at 56.0 came out better than even the most optimistic forecast . In light of this news, cyclical assets performed well across the board and the USD was on its back foot against most currencies.

The week ahead

In contrast with better news from macro data, the negotiations about the next Greek package are still ongoing and this is likely
to remain the key focus of this week.  The present value reduction in a PSI has still not been formally agreed. It will be interesting to see if we get any indication from the ECB of its willingness to participate in the Greek PSI.  The Greek Government has yet  to commit to more reforms
in order for the Troika to agree to a new program. This morning’s 11am deadline for this commitment came and went and no agreement was forthcoming.

Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, and a few others. On the UK side, it will be interesting to see the level of QE2 extension with the market largely going for £50bn, whilst a
small minority are looking for £75bn, which we believe could be a risk (and GBP) positive news. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

Good trading!

The key event of the week past was the FOMC statement essentially doubling the conditional commitment period for the Fed Funds target
range and Chairman Bernanke sounding quite open to further unconventional policies if the recovery remains weak. The advanced Q4 GDP print on Friday played into a weak recovery, with a strong contribution to growth from inventories casting doubt over the strength of growth going forward.

In the world of FX, the Fed’s dovish stance and signals of extended accommodation in low rates for years to come played havoc with the market’s overall USD long positioning and “risk off” mode. We saw a 2%+ USD sell off vs primarily high beta currencies triggering stops and significant position offload by short term players. Some analysts were quick to point out  that last week’s EUR strength also had improving fundamentals behind it, highlighting yield spreads and a current EURUSD fair value level of around 1.3100. The pair quickly overshot these levels posting a high of 1.3235, its recent uptrend channel resistance (currently 1.3065/1.3265). The market seems split into those who see the USD weakness and risk on from the Fed effect going longer and those who are happy to play the short term ranges and who have a predominantly “risk off” appetite based mainly on Eurozone evidence that nothing is fixed as of yet.

The week ahead

The week ahead should help cement one of the two views above. We start with the EU Summit, where discussions will be focused on finalizing negotiations around the fiscal compact, and- yet again- on Greece , where negotiations over PSI continue, in addition to negotiations between the
Troika and the government. The IMF mission is scheduled to remain in Athens at least through Friday.

The week also brings important Eurozone bond auctions into focus, starting with Italy on Monday (at 5- and 10-year tenors), followed by
France and Spain on Thursday.

Global PMI round is next with the releases of Manufacturing PMIs for Germany, France, and the Eurozone composite on Wednesday. Investors
will also be focused on the release of China’s Manufacturing PMIs on Wednesday and Non-Manufacturing PMIs on Friday.

On the US front we get Monday’s Core PCE release (the Fed’s preferred measure of core inflation) We feel this is a key piece of data as the
three month annualized showed that inflationary pressures declining at a pace unseen since the middle of 2010. A further decline will have a significant impact on investor’s expectations and support last week’s Fed talk about further balance sheet expansion potentially pushing USD to new short term lows. The week is closing with the NFP. As usual, most of the market puts the expected number into a raffle, which tells you all you need to know. Wednesday’s ADP report may give the market more colour, but do far consensus is rather widespread with most going for continual moderate grown on payrolls.

World Markets weekly write-up:

The week that was

First week of the year kicked off with good risk appetite.  Main market focus remained mostly on the
European side with the sovereign debt crisis, and Hungary making the headlines,
whilst on the US side we got job market and PMI numbers. The Spanish deficit
was revised wider than previously thought, weighing on bonds in the first
trading week of the year. In Hungary, legislation passed in late 2011 led to
tensions between the IMF and EU about financial assistance, increasing the risk
of a balance of payments crisis and thus weakening the HUF.

In the US, non-farm payrolls showed stronger gains than
expected on the back of gains in temporary employment, which is a seasonal
factor. However, underlying growth was still firmer than in the preceding
months.  PMIs also improved on both sides
of the Atlantic with ISM moving to a solid 53.9. While there are still some
seasonality issues in the data due to the sharp decline in ’08/09 and which
might have contributed to the positive reading, they can only explain part of
the strong data in the US. The Euro-zone and UK composite PMIs rebounded
sharply but the former remained firmly in recessionary territory.

Despite the positive surprises in data releases, the risk
rally tailed off towards the end of the week. It is was clear that the key
concern remains the Eurozone crisis with most of the critical  and yet unresolved issues – the ESM, Greek PSI
levels, the orderly/disorderly debate on the Greek bankruptcy, the upcoming
Italian funding hump and  the proposed
transaction tax – are again openly debated after the holiday lull. The Euro
closed the week on the lows and it is widely expected that the USD
strengthening/Euro weakening trend will continue for now with many analysts
highlighting targets from 1.2000 to 1.2450 for the weeks to come.

The week ahead

This week starts off with the “Merkozy” meeting today. It is
likely to be the main focus of the week, as well as continued debate of the
Greek PSI and the upcoming ECB policy meeting on Thursday where no rate change
is expected. It is hard to expect much Eurozone resolution forthcoming from any
side, although comments will be scrutinised as always. We can’t help but
feeling a repeat of the tunes played before Christmas, and this process is
likely to push the EUR lower in the next couple of weeks, while the missing
details for better fiscal policy coordination are getting negotiated. Alongside
the Eurozone, we also due to get the first MPC meeting of the year from the UK.
No change is expected either, but there are some analysts expecting an increase
in asset purchases (QE).

On the data side, we expect November IP data from a number
of countries including Germany, France and the UK. Market consensus expects the
aggregate Euro-zone IP to have contracted by about 0.2%.  Finally, a fair few bond auctions from Italy,
Spain and Germany towards the end of the week, which as a habit of late are key
focus events.

Today

Germany IP (Nov): Out at -0.6% mom above consensus of -0.5%
after 0.8% in October. .

Merkel & Sarkozy Meeting

Also Interesting: Hungarian trade and budget balances, and
other political noises.

Tuesday 10 January

France IP (Nov): Consensus expects 0.1% improvement mom
after a 0% in October.

German Retail Sales (Nov): Consensus expects another flat
0.0% mom reading.

Also Interesting: Swedish industrial production.

Wednesday 11 January

Poland CB Meeting: Consensus expects no change from 4.50%.

Also Interesting: Spanish IP, Fed Beige book

Thursday 12 January

ECB Meeting: We expect no change from 1.00%, in line with
consensus.

BOE Meeting: We expect no change from 0.50%, in line with
consensus.

US Retail Sales (Dec): Consensus expects 0.2% mom after 0.2%
in November.

Also Interesting: Euro-zone/German/Italian/UK/ IP (Nov),
France CPI (Dec), Japan trade and current account balances (Nov), Spanish bond
auction.

Friday 13 January

U Michigan Consumer Confidence (Jan): Consensus expects 70.4
after 69.9 in December.

Also Interesting: Italian bond auction.

Happy trading,

The WM team

It is easy to see why. In investment terms, 2011 hasn’t
exactly been stellar. A lot better things were forecast for 2011 at the same
time last year, only for the deepening Euro crisis to put a spanner in the
works and a massive dent in investor confidence. It is interesting to realise
that, for example, for all the volatility of the S&P during 2011 (its range
was 20% wide), it ended the year roughly 1% up on an annualised basis. This was
a tough environment for any active or passive money manager, pension fund and
the like to produce decent returns.

So what does the market pitch 2012 to be? From the bullish
to bearish via the “yet the same again” view point, there are a few themes
where many agree. I have summarised them here in no particular order, if only
to kick off the year here at World Markets.

• The first observation is that there is evidence
  of increased economic resilience outside of the Eurozone. Risk appetite was
  averaging at very low levels during the second half of the year, but it seems
  to be improving as investors are looking at:

• Positive data surprises which are continuing on
  the US side of the equation. There is added conviction that a double dip into a
  recession in the Eurozone does not automatically equal the same on the other
  side of the Atlantic.

• The UK is still in the dark part of the tunnel,
  but –whisper it- could gain traction if the US actually avoids the R word.

• In currency terms, opinion differs on what each
  of the above could mean. The general sense is that solid evidence from an
  improving US economy should attract investment and thus lead to a stronger USD.
  This however would push risk appetite higher in other assets, where entry is
  most efficient through USD funding, thus adding low pressure to the USD.

• The common loser in either case would/could be
  the EUR, which would likely lag any rally on global risk, unless that global
  rally comes as a result of swift action/resolution in Europe. Which we think is
  highly unlikely.

• Solid emerging markets, like Brazil, Mexico and
  the far East (excluding Japan and China) should remain higher yield investment
  destinations and thus their currencies ought to outperform.

• So would developed markets such as Australia,
  New Zealand and perhaps Canada at a push.

• The safe haven destinations are ever so slowly
  shifting. The Swiss franc has been effectively capped, and its “real” cash rate
  within the country is negative. The only way for the CHF is an ordinary fall
  from here.

• Whatever the risk scenarios, the common sense
  approach dictates that we are likely to continue in a subdued global growth
  environment with very low rates across the world, facts that would impede on
  investors performance.

• Under this environment, the global currencies’
  market impact as a standalone investment avenue is likely to continue to grow
  with increased global speculative flows.

Happy trading and all our best wishes for 2012 everyone!

The WM team

For EURUSD, it is the first significant up day in more than 3 weeks and from this point of advantage, it looks like a test towards the 1.3250/55 level is a probable outcome, thus confirming October’s downtrending triangle (shown in red).  Further USD softness during the Xmas break cannot be ruled out mainly for reasons of seasonality (end of December traditioanlly sees Global Equity rallies and USD weakness) as well as interest rate differentials that currently seem to be favouring a EURUSD balance just short of 1.3400. So to recap, resistance at 1.3250  on the top side is favoured vs support at 1.2945.

Maintaining our Euro centric commentary, last week was
highlighted by a – largely expected – ECB rate cut by 25bp to 1% as well as some
changes to the LTRO (long term refinancing operations) program that was
extended.  Moreover, Mario Draghi, was  also making his own tracks last week by not
extending (nor committing) to any further periphery bond purchases by the ECB,
thereby driving risk appetite lower.

We have since had an EU summit of course, out of which – dare
we say as expected – not a lot came out. The key point was a provisional
agreement towards something that could potentially resemble a fiscal union (
aptly named fiscal compact) along the lines proposed by Merkozy and which
should be put into action by an inter-governmental treaty. Which effectively
the UK vetoed (more on this on a news kiosk near you). It was also decided that
the ECB will manage the EFSF and ESM as of mid-next year, with the latter being
capped to Eur 500bn and not being given a banking licence (as was discussed
previously and in market circles). Finally the Eurobond can was kicked further
down the road, also into the middle of next year with a report (likely to be 2
trillion pages) on their feasibility to be published in June.

To cap it all off, we had the overnight news from Moody’s
stating that , unhappy with the Euro Summit, they would expect to stat reviewing
Eurozone country ratings throughout Q1 next year, the ominous hypothesis obvious
being the impending ratings bloodbath to come. And to quote:

“As a result, the communiqué does not change our view that the crisis
is in a critical, and volatile, stage, with sovereign and bank debt markets
prone to acute dislocation which policymakers will find increasingly hard to
contain. While our central scenario remains that the euro area will be
preserved without further widespread defaults, shocks likely to materialise
even under this ‘positive’ scenario carry negative credit and rating
implications in the coming months. And the longer the incremental approach to
policy persists, the greater the likelihood of more severe scenarios, including
those involving multiple defaults by euro area countries and those additionally
involving exits from the euro area.”

The week ahead

Looking forward into this week, data
on the European side of things peak on Thursday with the flash release of EMU
wide PMIs, which are expected to come in lower. The market will remain focused
to the usual news lines from the European extended circus as well as to the
plentiful Eurozone government bond auctions starting  with France today (raising Eur 6bn in short
term Bills), and Italy and Spain coming on Wednesday and Thursday respectively
for more important 5Y & 10Y auctions.

On the US side, we expect a raft
of key data for November, inflation, Retail sales, manufacturing confidence ,
Industrial production, and not least Tuesday’s Fed meeting. The gross
expectation is one incremental recovery, on an “inch forward basis”, whereas
the Fed is not expected to shift its policy stance (if anything they may come a
bit brighter on the outlook given recent data).

Overall, we perceive the market
as rather thin and at the onset of the seasonal “holiday” mode. This is a
particularly difficult time for short term traders, albeit this year with
intraday currency volatilities being rather high the rewards of successful trades
can be high. Our take on short term trades remains USD positive for the week,
albeit in “buy the USD dips” mode rather than outright at current levels. See
our chart updates for more details.