Even the reported US push for planned global imbalance adjustments - in the context of which FX problems fall - failed to materialise, though this may raise the stakes of US President's upcoming Asia trip, where he may choose to address currency policy directly with regional leaders.

Investors concerned about early tightening can take heart from the G20's commitment to "provide support for the economy until the recovery is secured". This caused USD to sell off from market open as we sat and waited for trading opportunities in Pro Traders Club, while price moved in one direction. The G20's concerns about the current state of the world economy - uneven recovery, dependency on policy support and high unemployment - were stressed at the beginning of the communiqué and the logical conclusion is that it is recognized that monetary and fiscal stimulus are both still needed until these problems are fundamentally resolved. In summary, this offers an open door to risk, as we've seen in price action.

Again, the G20 mentioned coordination during the exit phase, but there no timetable was given, and policymakers pledged to implement plans "flexibly, taking full account of variations in the pace of economic recovery and market conditions across countries and regions, and the complex interactions between different policy areas". ECB President Trichet affirmed such a position, saying a "progressive, gradual phasing out of non-conventional measures is envisaged". The G20's current stance will be helpful for risk appetite and not inconsistent with the policy statements made by individual central banks in past months.

Even on the sidelines, it does not appear the dollar or FX in general was a major discussion topic. However, US Treasury Secretary Geithner said in a post-meeting interview that a more flexible FX regime in China would be 'helpful', while Russian Finance Minister Kudrin said he was opposed to helping industry with artificial exchange rate adjustment. It appears that some emerging market nations are starting to acknowledge that maintaining exchange rate inflexibility is not a sustainable growth model. However, we do not expect rapid implementation of reforms during the recovery phase of the current economic cycle.
§ Next year's G20 summits and irregular meetings will be held in South Korea, who will assume the G20 Presidency. The date of the next meeting is still to be announced.
EUR/USD


Risk appetite is in buoyant mood after last week's policy decisions and the weekend G20, which broadly committed policymakers to continued provision of liquidity and avoiding hasty exit strategies. This has put further pressure on the dollar and pushed through 1.50 again, though failed to stay above this level. All major Asian equity markets ended the day on a solid note while European equities are also firmly in positive territory.

Non-farm payrolls for October came in at -190K (cons. -175K) but the disappointment was somewhat offset by the September figure being revised up to -219K from -263K previously. Average weekly hours were unchanged at 33.0. The unemployment rate climbed to 10.2% in October (prev. 9.8%), far higher than consensus expectations of a 9.9% print.

This week, initial jobless claims should remain relatively unchanged at 515k. The four-week average of initial jobless claims fell to the lowest level since Jan 10 this past week and we expect claims to continue to fall ahead, although, for now, they are still high enough to signal large monthly declines in payrolls.

It will be interesting to see what Fed officials have say following the disappointing labour data, with Lockhart, Yellen, Rosengreen, Tarullo, Fisher and Evans all due to speak this week. Any signals that the weaker data could prolong the period over which of the policy rate remains "exceptionally low" could heap further pressure on the dollar.

JPY: FX doesn't feature at G20 meeting

At a joint press conference after the G20, BoJ Governor Shirakawa said that a low-interest rate policy would continue to be pursued in Japan until a domestic economic recovery is guaranteed. Vice-Finance Minister Noda said that Japan's focus will be on achieving economic growth by stimulating domestic demand. He added that "foreign exchange, including the yuan, wasn't a main agenda topic, so I had no opportunity to talk about that issue".

Japan's FX reserves reached a record high of $1.057 trn in October, up from $1.053 trn in September. The increase was probably due to valuation effects due to the rising dollar value of the reserve's non-USD components.

AUD, NZD: Number of home loans increase again

The number of home loans outstanding (excluding refinancing) rose by 5.5% m/m in September, well ahead of market expectations (cons. 3.0%, prev. 1.6%). Our economists note that this data is consistent with building approvals rising a further 30% from current levels.

Meanwhile job advertisements fell by 1.7%, but this amounted to only a partial retracement of last month's 4.4% increase.

UBS economists still expect a third 25bp hike in December but acknowledge that the RBA decision remains data-dependent, and will be a close call. This week's data releases will be critical to the decision. The highlight will come on Friday with the release of October's unemployment data, which is expected to tick higher to 5.8% from 5.7% in September.

The NZD rose sharply this morning following the news that a major dairy cooperative would offer higher prices to its farmers as global demand for milk products continues to grow. New Zealand's main data release this week will come on Wednesday in the form of retail sales. The rate of increase of retail sales for September is expected to moderate to +0.4% m/m (prev. +1.1%).

GBP: Inflation report due

We expect the MPC to indicate a pause rather than a complete stop in QE in this week's Inflation Report. Our economists think that last week's extension probably marks the end of the QE program, but will revisit the outlook following the release of the Inflation Report. The BoE recently noted that inflation is likely to rise sharply to above the 2% target in the near term, reflecting higher petrol price inflation and the reversal of last year's reduction in VAT. However, these are just base effects and are not underlying reasons for the BoE to suddenly turn hawkish.

Sterling continues to recover following the BoE decision as officials appear more encouraged by recent data and surveys. We continue to hold a generally favourable view on sterling's long-term prospects as conditions may improve heading into next year as the economy rebounds. But we remain cautious in the near term as policy remains unsteady. On the data front this week, the ILO unemployment rate for September is expected to rise to 8% from 7.9% previously.

Source: Deutsche Bank, UBS, Bloomberg

Tags: Risk Appetite