ECONOMETER

A US holiday (bond market closed) and positive data in China over the weekend helped to result in an easing in risk aversion overnight although this was probably more due to relatively limited market action in thin trading conditions. Consequently the VIX ‘fear gauge’ fell sharply. Holidays in Asia today will similarly keep activity limited. The improvement in risk appetite did little to undermine the USD (index) which remained at its highest level since early September and shows little sign of reversing.

The Eurogroup meeting yesterday did not as result in an agreement to deliver Greece its next loan tranche but this came as no surprise. In the US there appeared to be some traction towards resolving the fiscal cliff, with a Senior Republican economist indicating that Congress should agree on higher taxes for the wealthy ahead of formal discussions on averting the fiscal beginning on Friday.

EUR/USD’s slide has continued unabated and looks set to test its 100 day moving average level around 1.2639. Its weakness can be attributed to the usual suspects, namely uncertainty surrounding Greece and Spain. The currency may gain a little respite today in the form of a small rise in the German ZEW investor confidence expectations index but it will be insufficient to turn the EUR around in the short term.

At a time when the US fiscal cliff is rapidly overtaking peripheral Eurozone issues as a cause for concern, the inability of the EUR to capitalize on this is a bit disconcerting. Some clues to the timing of the next Greek loan disbursement will undoubtedly help the currency assuming that it is not too far into the future. The EUR will also need today’s Greek treasury bill auction to go well to give it some support. Unfortunately for the currency the risks are still skewed to the downside.

UK data flow has been poor to say the least and includes a series of disappointments through November including manufacturing confidence, construction confidence, industrial production and retail sales (BRC). The Bank of England did not deliver on any further policy easing at its meeting last week and clues to further policy moves as well as GBP direction will emerge from a slate of data over coming days. Unfortunately the releases will not bode well for GBP.

October CPI Inflation today is set to reveal an increase while retail sales are likely to have fallen over the same month. The main event will be the quarterly inflation report (QIR) tomorrow and this will see upward revisions to short term inflation forecasts although we still see scope for more QE early in the new year. GBP will find little support from the data or the QIR leaving the currency exposed to further declines against a relatively firm USD and a resumption of weakness against the EUR. I look for a test of EUR/GBP 0.8081 in the short term.