Weekend Meetings in Washington do Little to Encourage Optimism; Oil Declines Set to Continue through the 80 Level

Risk assets continue to trade on shaky footing this week after weekend meetings in Washington failed to inspire confidence for equity markets. The IMF communiqué essentially said that markets have entered into uncharted territory and that central banks will need to show vigilance in order to restart global growth trends. Clear specifics were lacking, however, and markets chose to interpret this lack of direction as a negative. The EUR/USD trades at its lows of 1.3390-1.3540 with the USD/JPY trading at 76.20-76.70.

On Sunday, the German Chancellor (Merkel) made comments saying there is a possibility that we will see an insolvency from on of the Eurozone countries. On the positive side, she did say that the upcoming vote on the EFSF program should pass through the German parliament with a clear majority. This does not mean that we will see the same thing in the rest of the votes in the Eurozone but any agreements at this stage will be viewed as progress and makes the next Greek bailout loans more likely to be paid out (thus avoiding a default).

Also this week, an ECB Council member (Nowotny) suggested that the ECB GDP forecasts for the Eurozone might see further downward revisions. GDP forecasts were cut previously during the September monetary policy meeting, so any further revisions would bring some volatility to regional equity markets.

In Canada, the BoC Governor (Carney) made a statement confirming a cautious bias within the central bank. The statement was relatively ambiguous, however, as he said that Canada is not in need of stimulus injections but he did say that if macro data starts to disappoint to the downside the BoC has some room to lower its base policy rate. Canada’s heavy exposure to US assets has led many analysts to suggest that we will see downside surprises in Canadian economic data, so if these forecasts are correct, the USD/CAD will continue to extend its current rally above parity.

On Saturday, the SNB Chairman (Hildebrand) said that the central bank’s decision to peg the CHF to the Euro will be strongly defended and there have even been recent rumors that the SNB will raise this floor from the 1.20 area that was put in place previously. Swiss export companies have made statements to newspapers saying that the current price floor is too low and that is the current trends are not reversed, annual GDP figures could be significantly lower than market estimates.

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