A timely report from Standard & Poor's Ratings Services has outlined a stable U.S. financial institutions sector in 2008. The ratings agency sees most of their rated financial institutions retaining solid financial fundamentals in spite of the serious loan and asset-quality pressure. They commented, “While we expect the credit cycle to extend well into 2008 - if not into 2009 - there's no reason to expect that prudently managed, well-diversified financial institutions will experience ratings downgrades.” Indeed, they consider that U.S. financial institutions operate good risk management techniques, efficient operations and liquidity with a diverse range of revenue and funding sources. There may have been cried of anguish over the level of the Euro, but in September Germany’s trade and current accounts remained buoyant, widening by more than forecast. The trade surplus rose by EUR 4.0bn from August to record a strong EUR 18.1 bn surplus. The current account fared even better, almost doubling to EUR 15.4 bn. Within the figures exports rose by 3.3% and imports declined by -0.4%. Swiss unemployment has succumbed to the recent turndown rising by 0.1% to 2.6% in October. However, this is still 0.5% lower than the 3.1% level a year earlier and represents a still robust economy. Further bad news, but not too surprising for those who read these reports regularly, from Japan as the Economy Watcher’s Index which surveys shops with direct access with clients continued to slump. The current index dropped by 1.4 points to 41.5 in October, the seventh consecutive month of declines to a 4 year low. The outlook index slid further by 2.9 points to 43.1, the sixth consecutive drop. Japanese merchants cited declining wages and a weakening job market amid a background of higher taxes that is forcing consumers to make cutbacks in spending. Consumer spending accounts for 50% of the economy and the pessimism arrives at the same time as overseas exports are being hit which is driving down overtime payments – the only element of the wage packet that has been providing relief to soft basic wages. Lower machinery orders indicates lower capital spending over the coming 3-6 months which will trigger lower overtime further while unemployment jumped to 4% in September. It flies in the face of the BOJ’s comments that demand for workers will eventually drive wages higher. Fukui repeated this statement earlier in the week but there is just no sign of his comments being anywhere close to accurate.
The following economic releases are due today:
U.S. October Continuing Claims (27th)
U.S. November Initial Jobless Claims (3rd) 330K The ECB and BOE are due to announce their rate decisions
Today’s releases will be dominated by the two rate decisions from the European Central bank and Bank of England, but set within the background of China’s Cheng Siwei’s comments that China should shift more of its $1.43 trillion of currency reserves into "stronger currencies," such as the Euro, to offset "weak" currencies like the dollar.
The comments from China are either imprudent or an attempt at politicking amid the global clamor pushing the authorities to revalue the Yuan. Either way it doesn’t make too much sense given that China probably has something close to US$ 900 bn in U.S. Dollar assets and would suffer exchange losses by making such a statement before acting. More likely they have started the process already, more by placing new funds to alternative currency assets. Indeed, latest numbers show that China’s U.S. Treasury assets were down by 5% to around US$ 400 bn. The market will not take long to realize that this is a non-even at this stage and that panic Dollar selling has been over the top. This leaves just the ECB and BOE rate decisions today and the increasing level of losses being announced by Wall Street investment banks as the prime catalyst for any possible further sales. However, the market has been discounting the ECB rate hike for some while. The bigger question has always been, and remains, the timing of this hike. It really isn’t a new factor in the market. The ECB has a choice of two alternatives. It either raises rates today and sends out a less hawkish (versus a more dovish) sounding statement raising doubts over the next move, or it delays another month and does exactly the same thing. Trichet values verbal discipline but he will be loathe to hike rates and watch the Euro rush to new highs and thus the issue is really in the statement. On the other hand the BOE has a higher certainty of an unchanged policy. Talk has been of a rate cut, but this will be deemed to be too early given inflationary pressures and the still not uniform moderation in growth. On an unchanged policy the BOE will not issue a statement and the market will need to wait for the minutes to be released. In general the Dollar has made modestly firm recoveries against most currencies, and very strongly versus the Canadian Dollar where the downtrend has been the most aggressive. It looks very much like a spike bottom but this is still only in the short time frame and there still needs to be further gains to consolidate the recovery. Against the European currencies the pullback higher has been less aggressive but has been from key weekly targets and thus, given a less Dollar bearish statements following the rate decisions could maintain the recovery. Still the jury is out, the market is jittery and there can still be some very volatile moves before the story plays out… However, don’t forget we are approaching a long U.S. weekend which should trigger some position squaring and profit taking.
Note important support and resistance areas:
USDJPY EURUSD USDCHF GBPUSD
Res: 114.40-44 1.4729-50 1.1452-00 2.1133-74
Res: 113.07-38 1.4668-84 1.1350-94 2.1030-70 Spt: 112.07-30 1.4594-12 1.1256-78 2.0950-72
Spt: 111.57-75 1.4470-97 1.1183-18 2.0846-71 | 
