The ECB will gradually withdraw the extraordinary liquidity measures during 2010 which should help underpin the Euro. There is likely to be increased pressure for the tightening to be delayed. There are also likely to be increased fears over the structural vulnerabilities with some further speculation that countries such as Greece could be forced into a debt default which would trigger heavy selling pressure on the Euro. There is also likely to be verbal intervention to curb further Euro appreciation which will curb any initial gains.
The Euro maintained a generally firm tone against the dollar and Sterling, but failed to hold its best levels in a choppy market with some fears that the Euro is over-valued while there were also continuing fears over underlying internal stresses.
As expected, interest rates were left unchanged at 1.00%following the latest council meeting. The ECB announced that the long-term 12-month liquidity tenders would cease in December while the shorter-term programmes would continue into 2010.
There were mixed comments from bank President Trichet, although the overall tone of his comments was slightly more dovish than expected and the Euro failed to hold initial gains with fears that the economy would not be able to achieve a self-sustaining recovery during 2010.
In comments on Wednesday, Euro-group head Juncker stated that the Euro was overvalued which will create some caution over currency buying.
There was a firm reading for German retail sales while the unemployment data was also stronger than expected with a monthly decline supported by government fiscal measures. There was a small upward revision to the Euro-zone PMI manufacturing data, although there was also important signs of divergence as conditions in Spain and Greece deteriorated.
Yen:
The Bank of Japan action to provide additional low-cost financing is likely to have only a limited direct impact on money markets and the yen. There will, however, be speculation of further policy action by the central bank. There will also be pressure for yen gains to be resisted as currency strength will tend to intensify the deflation threat. The yen should still gain strong protection given a reluctance to push funds overseas amid speculation over competitive devaluations throughout the major economies.
The Japanese yen remained strong at the start of the week, but was unable to break through the 85 level and was then subjected to a sharp reversal.
The yen weakened sharply in Asian trading on Tuesday as the Bank of Japan announced an unscheduled policy meeting. There was speculation that the bank would announce additional easing measures to help ease the deflation threat with the potential for additional quantitative easing.
The yen weakened to lows near 87.50 against the dollar before recovering back to 86.80 as the bank announced a new 3-month lending facility. Markets were sceptical that the measures would have a substantial impact.
Risk appetite attempted to stabilise during the week with solid readings for the Chinese PMI readings which underpinned hopes for a regional economic rebound, although confidence was still fragile.
Finance Minister Fujii stated that he had not ruled out intervention. There were comments from the Prime Minister that yen strength needed to be tackled and underlying pressure for yen gains to be resisted increased during the week. |