With attention fixed firmly on US political developments, the Euro-zone has still tended to be out of the headlines. Underlying growth conditions are still extremely weak and there are certainly underlying concerns within the ECB, especially with an underlying tightening of monetary conditions. With potential deflationary pressures, there will be pressure for further ECB action and a cut in interest rates. There will also be the potential for verbal intervention to restrain the Euro if the currency continues to deteriorate.
The Euro was not the main focus of attention during the week as the currency tended to gain support, partially by a lack of alternatives as it strengthened against the dollar and also secured gains against the yen.
There were further generally dovish remarks from ECB officials with Bonnici stating that the ECB was prepared to introduce negative deposit rates, but that there were some complications. The Euro-zone data releases had little impact as a consumer inflation reading of 1.0% reinforced expectations of a dovish ECB policy stance and potential for additional policy action if deflation fears increase further.
There was nervousness over the potential for verbal intervention by the ECB to curb Euro gains and some further speculation that the central bank would be forced to cut interest rates again in order to combat potentially deflationary forces within the Euro-zone. Markets have generally not been focussed on the ECB policies during the US shutdown, but this could change rapidly if Euro-zone tensions increase.
The headline German ZEW index was stronger than expected at 52.8 for September from 49.6 previously. The overall elements were, however, mixed and failed to provide any sustained Euro support and a sharp decline in Greek bond yields also failed to provide any headline currency backing, although there was evidence of further net equity inflows into the Euro-zone.
The Euro was not the main focus of attention during the week as the currency tended to gain support, partially by a lack of alternatives as it strengthened against the dollar and also secured gains against the yen.
There were further generally dovish remarks from ECB officials with Bonnici stating that the ECB was prepared to introduce negative deposit rates, but that there were some complications. The Euro-zone data releases had little impact as a consumer inflation reading of 1.0% reinforced expectations of a dovish ECB policy stance and potential for additional policy action if deflation fears increase further.
There was nervousness over the potential for verbal intervention by the ECB to curb Euro gains and some further speculation that the central bank would be forced to cut interest rates again in order to combat potentially deflationary forces within the Euro-zone. Markets have generally not been focussed on the ECB policies during the US shutdown, but this could change rapidly if Euro-zone tensions increase.
The headline German ZEW index was stronger than expected at 52.8 for September from 49.6 previously. The overall elements were, however, mixed and failed to provide any sustained Euro support and a sharp decline in Greek bond yields also failed to provide any headline currency backing, although there was evidence of further net equity inflows into the Euro-zone.
Yen:
Immediate uncertainty surrounding the US budget situation has eased which will help underpin risk appetite and lessen defensive demand for the yen. Underlying yield considerations will remain negative for the Japanese currency and there will be further concerns surrounding longer-term fundamentals with particular concerns surrounding the debt burden. The dollar will still find it difficult to gain substantial support unless there is a significant shift in Fed expectations.
The dollar was unable to make any impression on the yen during the week with the Japanese currency also unable to make any headway against other currencies with the dollar consolidating around 98 after finding support just below this level.
The dollar dipped lower again as Fitch put the US credit rating on negative watch due to the budget impasse and warned that it could downgrade the rating even with a deal.
There was an improvement in risk appetite with relief following the US deal with global equity indices at record highs and expectations that there would be a fresh flow of funds into carry trades. These expectations were important in curbing yen demand and, in this context, both the dollar and yen were generally out of favour.
The latest capital-account-data recorded a net outflow of funds from Japan in the latest week from sharp inflows the previous week which suggest that the threat of capital repatriation eased quickly which will lessen the potential for yen gains and the dollar consolidated around the 98 level on Friday with China’s GDP growth of 7.8% for the third quarter not having a major impact. |