The Euro-zone data has continued to suggest a gradual improvement in conditions, but there will also be persistent fears that the recovery will not prove to be self-sustaining given the underlying structural vulnerabilities. There will also be some unease over the risks to the economy posed by any further Euro strength, especially as the currency is fully valued at current levels and there is likely to be some further rhetoric cautioning against further appreciation.
The CDU victory in Germany’s Federal election provided an initial Euro boost, but the Euro was unable to sustain momentum during the week as a whole.
The Euro-zone data recorded a better than expected figure for German unemployment with a 12,000 seasonally-adjusted decline for August. There was a poor German retail sales report with a reported monthly decline of 1.5% which put some initial downward pressure on the Euro.
The inflation data was slightly weaker than expected with a flash consumer inflation reading of -0.3% for September compared with expectations of -0.2%. The provisional German consumer inflation data was weaker than expected with a 0.4% decline in consumer prices for September to give an annual 0.3% fall.
EU's Almunia stated that the Euro's level would be discussed at the weekend G7 meeting. The comments reinforced market speculation that officials were looking to take a more determined tone in curbing Euro gains.
In testimony to the European parliament, ECB president Trichet stated that there was a gradual economic recovery, but that it was not yet time for an exit from the highly-accommodative monetary policies.
Yen:
Capital repatriation should be less of a feature over the next few weeks which will tend to limit the scope for yen support. There will be confusion over official currency policies. The Finance Ministry will tend to be opposed to intervention, but there will also be reservations over allowing rapid yen appreciation. The yen will still gain support if global risk appetite deteriorates. The net fundamentals suggest that the yen will not be in a position to sustain strong gains.
After a spike stronger, to highs near 88.20, the yen had a slightly weaker tone against the dollar, but remained generally resilient. Finance Minister Fujii stated that he would not rule intervention and the comments suggest that rapid yen gains have unsettled the government.
The headline Tankan business confidence index improved to -33 for the current quarter from -48 previously which was close to market expectations while there was a further downgrading of capital spending intentions to a 10-year low. There has been some divergence in stock-market performances with most regional bourses out-performing the Nikkei index which weakened to a two-month low.
The Japanese data recorded a slowdown in industrial production with a 1.8% monthly increase for August. The data helped sustain hopes for an economic recovery, but also maintained unease that the recovery will fade quickly as stimulus is withdrawn.
Core nationwide consumer prices also declined 2.4% in the year to August, maintaining deflation fears and there will be pressure for yen gains to be curbed given that a strong domestic currency will exacerbate deflation pressures. |