The Iberian Peninsula Grabs Headlines

November 12, 2015Political Economyby Marc Chandler

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Portugal needs a government while Spain may get two.

The US dollar is firm within fairly narrow ranges that have prevailed this week as the market consolidates its recent gains.  Draghi's comments to the European Parliament are similarly dovish in tone to the October post-ECB press conference.  Sterling posted outsized gains yesterday, pushing above $1.5200, and those gains extended to almost $1.5250 today before sterling sold back to $1.5175, leaving it almost flat against the euro.

Japanese machinery orders rose 7.5% in September, more than twice the Bloomberg consensus estimate, and fully recouping the 5.7% decline in August.  The Nikkei was up fractionally, led by utilities and tech while the decline in oil prices weighed on the energy sector.  The dollar has been confined to about a third of a yen range.  Thus far it has the makings of the third consecutive lower higher, and the greenback did make new lows for the week near JPY122.75.  With sizable options struck at JPY123 expiring today through Monday, this area will be pivotal.

The Australian dollar is easily the best performing major currency, gaining about 1% against the US dollar today.  The Aussie rose to almost $0.7155, highs for the week and the 20-day moving average by a stellar jobs report.  It is true that Australia's employment report tends to be volatile, and today's report may overstate the case, but the underlying movement is in the right direction.  The RBA recently recognized improved economic prospects, and specifically cited the labor market.

Australia grew 58.6k jobs in October, nearly four times more than expected, and of these 40k were full-time positions.  On top of that, the September series revised to show less weakness.  The unemployment rate fell back to 5.9% from 6.2%, totally unexpectedly, and this is despite the rise in the participation rate to 65.0% from 64.9%. 

Politics in the Iberian Peninsula have attracted market attention this week.  After the collapse of the minority center-right government in Portugal, the world awaits a new government.  DBRS is the only ECB-recognized rating agency that gives Portugal an investment grade rating.  It is set to review it tomorrow and at a minimum, anticipate a cut in the outlook.  A loss of its investment grade status, however, could make Portuguese bonds unacceptable for QE participation and cheap lending by the ECB.  Portugal's 10-year yield is off 5 bp today leaving it up about 7 bp over the past week.  

In Spain, the confrontation between independent-bent Catalonia and Madrid sharpened.  Meanwhile, the latest polls ahead of next month's election shows Podemos support slipping toward 10%, but the new centrist Ciuadanos at 21%, which is roughly half of what the PP drew, and leaves the ruling party with 26.5% support.  The Socialists are close with 24%.

The North American focus will be on the Federal Reserve.  Over the course of the day, no fewer than six Fed officials will speak.  Yellen starts the day around the time the equity market opens, and Fischer finishes the day a little before the Tokyo open on Friday.  NY Fed President Dudley is speaking shortly after midday.  While other Fed officials offer insight, we continue to place emphasis on the signals from the Fed's leadership.  Yet besides them, Lacker, a voting hawk and Ballard, a non-voting hawk speak.  Among these five officials, we expect a reiteration of the FOMC statement and the prospect for a move next month.  Chicago Fed's Evans has been among the doves, but he appears to have softened his position recently.

Dollar Firms, though Strong Jobs Lifts Aussie, Awaiting Fed-Speak is republished with permission from Marc to Market

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