EUR Game plan has not changed

Today is a big day for public strikes in the Eurozone. Spanish and Portuguese workers have managed to hold their first coordinated general strike. Unions in the neighboring countries of France, Italy and Greece are also planning work stoppages as part of a ‘European day of Action and Solidarity.’ One cannot underestimate the social cost of the spending and tax cuts of the individual countries austerity programs. Many on the ground level believe that these programs are only bringing further economic hardship while deepening the European crisis. It’s a vicious circle. Even the lack of European growth is expected to compound the situation. The public spat between the IMF and EU on the Greek shackling costs, only proves to many that their own bureaucrats are even divided on a solution for their own problems.

Industrial Production in the 17-member Eurozone fell sharply in September (-2.5%) as weak output across the core and peripheries lead many to expect a weak Q3 GDP print later this week. The headline disappointment was the largest decline in three-years and is in stark contrast to the previous months +0.9% increase. On a yearly basis, the print has fallen -2.3%. The report is littered with steep declines. On the month, energy output fell -1.8%, car production in France and Germany also helped to drag the headline down. The IP number for Portugal fell -12%, the largest loss in a dozen years, due primarily to strike action in that month.

The US Fiscal Cliff and Euro-zone jitters continue to affect emerging currencies, but probably not in the way many had been expecting. Under US QE3, the market had been worried that specific emerging CBanks would be battling a ‘massive capital inflow’ into their region, in other words, an overwhelming demand for their currencies. In fact, the exact opposite has occurred with the ‘mighty dollar’ dominating emerging currencies over the past ten-trading sessions. So much so that EMEA policy makers may need to intervene if their own currencies depreciate too much. Beforehand, the market had been looking at CBanks slowing down these currencies appreciation cycle.

Looking specifically at Japan, it seems that their very own QE program has ‘little teeth’ and is in danger of losing direction. The last BoJ meeting certainly disappointed the market, but ‘lost in translation’ was a new policy, pledged by the BoJ, promising unlimited amounts of funds at +0.1% over three years. Is this a statement indicating that conventional market methods are failing? Certainly looks like that. The BoJ is again being proactive and implementing something of a global, unsterilized LTRO nature, capped at +$190b for now. Instead of wholly encouraging lending outside the financial sector, it’s encouraging Banks to take this cheap cash and invest in the ‘carry trade.’ Banks using JGB’s as collateral can now use this cheap newfound wealth and go long ‘carry’ while selling JPY, pressurizing its value. Have the BoJ policy makers put much thought into the fact that the market could go long cheap JPY in times of stress?

This coming Friday the market expects the Japanese Prime Minister, Yoshihiko Noda, to dissolve the lower house for a snap election next month. It looks like his party is certain to lose. During last summer, his party had promised a call to election for opposition support to his sales tax increase. The last thing the Japanese economy needs is an election. Especially since they are sliding only deeper into recession and relations with China are worrisome.

This morning’s UK claimant count looks far worse than the actually UE rate. It was up +10.1k last month. In Q3, the total unemployment was down -49k, while the total in employment was up +100k. The unemployment rate fell to +7.8% from +7.9%. Vacancies were largely stable at +479k. The data points to a more positive trend in the labor market and probably good news for policy makers at the BoE, as average earnings remain under control. It seems that the BoE does not have to worry about any wage inflation just yet.

In the data stateside this morning, some analysts are looking for a contraction in the October headline retail sales (it would be first monthly fall in four). While much of the decline will likely be a product of one-off factors after several strong months, expect many to suggest that the soft numbers are a byproduct of the fiscal cliff concerns beginning to influence the retail behavior. Later this afternoon, the FOMC will release the minutes from their last meeting. The market will be looking for clarification on policy maker’s AP intentions and new innovations in the Fed’s communications policy.

Swiss buyers continue to toy around with the single unit this morning, mostly buying EUR’s through s/l levels on the topside. With these stops filled, new selling interest in the shape of EUR outright orders to go is expected to dominate. This market remains prone to wild swings and despite the weaker shorts been squeezed, the underlying bias remains to the downside, as daily momentum continues to issue negative readings. The market is a better seller of the single unit on rallies until proven wrong.

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EUR Game plan has not changed

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