Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Dec 19 08 08:42 GMT |

Overview & economic commentary The Bank of Japan voted 7-1 to cut interest rates to 0.1% from 0.3% overnight, and announced new initiatives to improve liquidity and the distribution of credit to the real economy. The Bank will buy commercial paper and may buy as much as 20trn yen of shares held by banks to boost their capital. The Bank also revised down the outlook for the Japanese economy for the second time this year, but made no reference to the strength of the yen. The yen weakened about 2.5% against its major counterparts yesterday after officials at the Finance Ministry refused to rule out intervention in the foreign exchange market. For a country where exports account for roughly 20% of gdp, the strong yen may put off overseas demand and exacerbate the recession. A quiet end to the week in terms of UK economic data saw consumer confidence recover slightly in December. The overnight release reported a rise to -33 from -35 in November, despite grim headlines on the labour market and fears of rising unemployment as companies cut costs. However, some of the pessimism may have been mitigated by sharp falls in interest rates and mortgage costs, and the heavy discounts on the high street and the reduction in VAT. Falls in energy prices should over time help to bring down actual inflation and inflation expectations and help real wage growth to recover. In the euro zone, German producer prices were also published earlier and showed a 1.5% drop in November. Annual PPI inflation slowed to 5.3%. A new all-time low for the German business confidence in December points to a further erosion of pricing power this winter. Currency commentary The dollar reversed some of this week's losses o/n as the correlation with lower oil and gold prices was (briefly) re-established. The move materialised through $/Y after comments by the Japanese Finance Ministry injected some speculation about fx intervention to stop the yen's appreciation. The BoJ cut interest rates earlier this morning but bearish comments on the Japanese economy could give participants ammunition to take profit in yen crosses (if equities don't fall), reversing o/n moves in $/Y below 89.0 and in €/Y below 127.0. €/£ is trading sub 0.95, but as long as EU/UK yields spreads do not narrow, we see no scope for a meaningful correction back towards 0.90. We are also keeping a close eye on £/chf and wonder whether the bounce from the 1.6095 low may have further to go during a Friday squeeze. Today is triple witching (simultaneous expiry of stock index options, stock index futures, stock options) and could exaggerate gyrations in financial markets Major data and events today UK Consumer confidence (GfK) (00:01) Nov -35 Dec (actual) -33 German producer prices (07:00) Oct zero Y-O-Y +7.8% Nov (f'cast) -0.4% Y-O-Y +6.5% Median -0.8% Range -1.4%:-0.2% French business confidence (07:45) Nov 80 Dec (f'cast) 78 Median 77 Range: 75:82 Japan interest rate decision (04:00) Current: 0.30% Actual: 0.10% Canada consumer prices (12:00) Oct -1.0% Y-O-Y +2.6% Nov (f'cast) -0.5% Y-O-Y +1.8% Median -0.5% Range -1.0%:+0.4% Canada consumer prices, core (12:00) Oct -0.2% Y-O-Y +1.7% Nov (f'cast) -0.3% Y-O-Y +1.4% Median -0.2% Range -0.3%:+0.1% Chart of the day: The BoJ cut interest rates to 0.1% earlier today. US and Japanese interest rates are now the lowest in the G7 Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.