A Few Developments while FX Grinds

The US dollar managed to extend yesterday's recovery against most of the major currencies, but a consolidation tone has emerged.  Narrow ranges continue to dominate.   

We suggested here yesterday that the euro could pullback to the $1.2880-$1.2910.  The euro tested $1.29 in late in the London morning.  Similarly sterling tested the $1.60 level, and below that we identified potential toward $1.5950-60.   

Part of what is happening is a bout of profit-taking on yen crosses.  The yen is the strongest currency today, gaining about 0.33% against the greenback and about 0.66% against the euro, which is the weakest of the majors. 

Global equity markets are mostly marginally lower, also consolidating last week's gains.   There are two notable exceptions to this generalization.  First, India's Sensex rose 1.6%, the biggest gain in two months as Moody's squashed speculation of a pending downgrade with a reiteration of its stable outlook.   Some buying was also linked to optimism over the economic reforms making their way through parliament.  

The other exception to note is Saudi Arabia's stock market.  It has retreated to 10-month lows yesterday amid concern that King Abdullah has not been seen since his 11-hour back surgery on Nov 18.  After last year's surgery, the then-87 year old king appeared on national television a couple days latter.  Not only had Saudi stocks been sold, but there has also appears to have been increased activity in the Saudi forward and swaps.  Following Prince Salman--Abduallah's brother and heir apparent--words of reassurance, Saudi shares are up about 0.8% today, led by technology and telecom.  

In terms of the majors, the news stream has been light.  The euro area reported a unexpectedly sharp rise in money supply.  M3 rose 3.9% year-over-year in October, more than 1 percentage point above expectations and compares with a 2.6% pace in September.  However, there are two mitigating factors.  First, 3-month/3-month metric used to smooth out the short run noise, is little changed at 3.1% (3.0% in Sept).  Second, and more importantly, the increase in money supply did not reflect an increase in lending.  Loans to the private sector fell 0.7%. 

Separately, German states are reporting fairly benign November CPI figures.  This points to a little changed national reading of 1.9%-2.0%.  When the ECB meets next week, despite facing a contracting regional economy, it is not expected to cut the repo rate.  It may requires a combination of a contracting economy into the New Year and a more significant easing of German price pressures to get the ECB to move on rates.  

Following the recent protracted euro area meetings, reports suggest that Merkel and Hollande's relationship has yet to thaw.  Not only are there stylistic and ideological differences, but Merkel made it clear she preferred Sarkozy.    Hollande's government took a step down a road yesterday that can add more tension to that relationship.    The French government reportedly threatened to at nationalize Arcelor Mittal's furnaces and steel fabrication unit in Florange.  Mittal wants to close down the furnaces, making "redundant" about 630 jobs.  Hollande wants the company to guarantee long-term employment in that facility.   

While many observers see the confrontation as a Socialist government taking on a multinational company, the record shows Sarkozy also clashed with the same company over the same issue.  There is two-fold sub-text here.  First, although many do not appreciate it, there are differences among socialists.  There is a moderate wing, which Hollande represents, and there is a more radical wing, perhaps represented by Montebourg, the Industry Minister.   The two general forces are wrestling for control/influence in the new government. 

Second, the dispute is not just about 630 jobs.  It is not just about the steel industry.   Unemployment is rising in France and data out yesterday showed another 45.5k (1.5%) increase in unemployment to 3.103 mln in October, the highest since April 1998.  The dispute with Mittal may be part the preparation and practice for the coming struggle over the European auto industry.  We note that while US auto sales have risen 15% this year on top of last year's increase of the same magnitude, European auto sales have slumped.  The industry suffers from excess capacity and France's ability retain a strong presence may be challenged by the increased competitiveness of the periphery.