FX Week Ahead: Markets likely to go easy into the final trading week of the year

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The markets look to the final trading week of the year although it is unlikely to expect to see much volatility as traders take a break for the holiday season. For the most markets, Monday was a holiday making this week a short trading week. Economic data across the board is also very sparse, made up mostly of second tier data that is unlikely to cause any big moves in the markets. The lack of trading volumes could however see some erratic behavior in the currency markets this week.

Richmond Fed manufacturing index set to rise

The U.S. markets are set to reopen on Tuesday after being closed on Monday. The economic data on Tuesday will focus on the conference board’s consumer confidence data which is expected to rise to 108.9, up from 107.1 which already at the pre-recession levels in November. A beat on the estimates could see the momentum continuing for the third consecutive month while posting a positive reading for the second month in a row.

Richmond Fed Manufacturing Index: +4 (November 2016)
Richmond Fed Manufacturing Index: +4 (November 2016)

Keeping in line with the recent uptrend in most of the regional surveys, the Richmond fed’s manufacturing index data is expected to rise to 5, from 4 previously. Data released earlier this week showed regional manufacturing surveys rising strongly in December which could potentially build into the ISM’s manufacturing PMI data due in a week’s time in January.

Japan consumer price index

From Japan, late Monday night and Tuesday will see the inflation data dominating the headlines. Household spending data is forecast to rise 0.2% following a 0.4% declines the month before. The National and Tokyo core CPI data is expected to show another month of declines, falling 0.4% and 0.3% respectively.

Tuesday will see the release of the Bank of Japan’s gauge of core inflation with forecasts showing another month of slower increase at the rate of 0.2%. This comes following a 0.3% increase previously in October. The fourth quarter inflation readings so far shows a mixed picture as the headline consumer price rose in October for the first time in nine months but core inflation continued to decline.

Japan Inflation Rate: 0.1%, October 2016
Japan Inflation Rate: 0.1%, October 2016

At the BoJ’s meeting last week the central bank gave an upbeat assessment of the economy while staying hopeful that inflationary pressures will resume.

Eurozone’s banking crisis

The rather slow week from the eurozone will likely put focus on Italian banking sector. Monte dei Paschi di Siena or MPS, considered to be the world’s oldest bank which is struggling under a mountain of bad debt will be rescued by the Italian government.

The government has previously allocated a funding of 20 billion euro towards the banking sector. MPS which until early last week pinned hopes that the Qatar Investment Authority would be the anchor investor saw its hopes dashed as talks failed. QIA had previously pledged support, subject to a ‘Yes’ vote on the Italian referendum. After PM Matteo Renzi resigned following the ‘No’ vote emerging victorious, J.P. Morgan which prepared to fund the failing bank also pulled out.

With the investors pulling out, MPS failed to raise the 5 billion euro in funding required for the ECB to step in, paving way for another bail-in.

The focus will remain in the Eurozone next week as speculation is rife that Italy’s banking sector requires as much as 52 billion euro towards recapitalization.

The euro has so far shrugged off the news as the single currency continues to remain well anchored to the downside against the U.S. dollar. Still any potential spill off from the crisis could spark a risk aversion in the markets.


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