Dollar Weak, but Little Changed

There has been much news for investors to digest, but the foreign exchange market is becalmed, though the US dollar remains vulnerable.   While most of the major currencies are little changed, the Norwegian krona stands out as an exception.  It has shed almost 0.7% against the dollar and nearly the same against the euro.  

The ostensible cause was an unexpected rise in unemployment to 2.6% from 2.5%.  A survey  by the central bank showed businesses expect output to be flat over the next six month.  The Norges Bank meets next week and there was little chance of a change in policy even before the data, but forward guidance will likely underscore that policy is on hold through next year.   

Ironically, the Swedish krone is faring better, down less than 0.2%, following a soft GDP report that heightens the risk of Riksbank rate cut at the Dec 17 meeting.  The finance minister had warned of a poor report and so it was.  Growth in Q3 was estimated at 0.1% rather than the 0.5% the Bloomberg consensus forecast.  This follows an upward revision to Q2 to -0.1% from -0.2%.

The Australian dollar had initially fallen to new 12-week lows, nearly a cent lower than yesterday's high near $0.9150.  The ostensible trigger was news that the government rejected a A$2 bln bid for GrainCorp from the US-based ADM.  However, the Aussie, which has been the poorest performing major over the past month, losing 4% of its value recovered and is little changed on the day.  The market still seems inclined to sell bounces ahead of next week's RBA meeting.  While no change in policy is expected, dovish guidance, especially on the currency can be expected.  

Japan reported key inflation data.  The headline rate was unchanged at 1.1%, while core rates ticked up. Excluding fresh food, which is the key measure for the government and BOJ rose to 0.9% from 0.7%. Economists put more stock in the measure excluding energy as well, and this measure rose to 0.3% from flat. It is the first positive reading in five years.  Separately, Japan reported disappointing real sector data. Industrial production rose 0.5% in Oct.  The consensus expected a 2.0% increase after Sept's 1.3%.  The year-over-year rate slowed to 4.7% from 6.3%. On the other hand the manufacturing PMI rose to 55.1 from 54.2 and housing starts were strong.  Separately, Japan reported unemployment was unchanged at 4.0%.  

The dollar reached JPY102.60 before consolidating.  The JPY102.75 area is thought to contain offers from Japanese exporters.  The euro reached JPY139.70 before stalling.  The JPY140 area is an important psychological level.  The Nikkei found little support in the latest weakness of the yen, but although large caps finished lower, the JASDAQ gained nearly 0.5%.  

In Europe, the news stream appears to ease some speculation that the ECB will take more action at next week's meeting.  Following yesterday's stronger than expected German and Spanish CPI figures, the flash Nov reading from the euro area ticked up to 0.9% from 0.7% and the unemployment rate slipped to 12.1% in November from 12.2% in Sept. Nevertheless, news that banks were repaying another 7.23 bln euros from the LTRO, bringing the repayment to nearly 400 bln euros, will further drain the excess liquidity, which is already at the lowest level in two years.   

Separately, S&P revised its credit outlook for Spain from negative to stable, citing improved growth prospects.  S&P has Spain at a BBB credit.  Spanish bonds may have gained on the news, but with the yield off less than 2 bp and other peripheral bond markets, including Portugal and Italy, firmer as well, it is not clear that the S&P announcement was much of a market factor.  

With an abbreviated and light North American session likely, look for the general consolidative tone to continue.  New incentives will be provided next week, with the PMI readings, a number of central bank meetings, and the US jobs data at the end of the week.  It could be the last of eventful weeks of the year, barring the FOMC meeting later in the month.