Friday Forex Wrap

Yesterday was Europe's turn to be the subject of markets' scrutiny. The single currency lost more than one per cent of its value versus the Dollar yesterday. The cause; GDP.

Even Germany seem to be struggling to grow their economy in such tricky times. Yesterday Berlin reported that their productivity in the fourth quarter was down 0.6% compared to the third. Markets were expecting a low reading, because the German economy is typically a little more sedate in Q4, but a move this low is the fastest decline in economic output since the start of the European crisis back in 2009.

The French also suffered with a 0.3% contraction of their economy, but perhaps the worst place to be right now is Italy. Italian GDP contracted by a massive 0.9% on the quarter, much worse than analysts' expectations. Italy also has the opposite situation to Germany, whereby their fourth quarter is historically stronger than their third (because their third quarter includes the one month summer holiday/shutdown). The move lower doesn't tell us anything new about Italy, because they're already in the longest recession they've had for twenty years. What it does do though is rock the Mario Monti campaign wagon, just ten days before the election.

One positive to come out of this data has been the move back down in the Euro. It's still trading above the perceived fair value of most of its member states, but the move down will reduce the noise coming from the French about interventionist policies and will return the focus of the so called 'currency wars' to Japan and the US.

This weekend the spotlight will be very bright and focused squarely on Japan at the G20 meeting in Moscow. After the G7 tried (and failed - miserably) to reassure markets that their common agenda was to allow market forces to determine exchange rates, the G20 will be picking the ball up and pressing Japan not to use such aggressive policies to devalue the Yen. This is something that the Japanese will certainly take issue with because so far their efforts have seen the Nikkei index rally 32% in the last four months, meaning they are taking giant steps forward in their bid to reflate their economy and are obviously keen to keep up momentum.

Another area of focus for the G20 will be to look at the pace of their budget cuts. At the 2010 G20 in Toronto, leaders agreed to have halved their budget deficits by 2013. So far many have failed to achieve this reduction and have also, possibly, cost a sustained economic recovery in the process. Whilst the so called Toronto agreement will expire this year, Germany will be championing a revised commitment to budget reduction in a sort of 'follow in my footsteps' proposal - Can't see that going down too well.

Today's economic calendar is pretty busy. UK retail sales are a worrying prospect for the Pound this morning. Some government debt statistics from Italy could provide yet another worry for the Monti administration with a looming election. In the US we get some industrial production, manufacturing production and Michigan sentiment numbers all come ahead of a market holiday for the US on Monday. The G20 will clearly dominate market sentiment though and we expect comments throughout the day that could move markets and is probably more likely to take risk of than put it on.

Thank you CM Trading

And that is a wrap!

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