Investment Research
11th -18th November 2013
Release date: 8th November, Friday

Weekly Outlook
Direction of Easing

MUTIS | Investment Division

WEEKLY MARKET-VIEW UPDATE
Foreign Exchange
1 week

1-month

3-months

EUR/USD

Sell

Sell

Sell

USD/JPY

Neutral

Buy

Buy

GBP/USD

Buy

Neutral

Neutral

USD INDEX

Neutral

Buy

Buy

Fundamentals
Euro
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Dollar
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The euro appears to be slowly emerging from the mess it was left in after the crisis as a lot of the recent data over the past few months has been heading in a positive direction for Europe. But the euro has been shaky and ultimately isn’t significantly better off than it was a few months ago. This suggests that most of the recent strength in the EUR/USD pair (to a high of around $1.38 per Euro) came about due to fears over the US dollar and suggests that the pair may be overvalued.
The powerhouse that is Germany is likely to remain the biggest driving factor for the euro area as a whole as Germany is likely to keep growing even though growth may remain sluggish. The next German ZEW Economic Sentiment is due to be released on
Nov 19th, with the previous result in October being 52.8 (an increase from 42 in August and 49.6 in September). If this turns out higher still this could provide some good strength to the euro and cause a temporary rise in the EUR/USD price.
The euro has an unemployment rate of 12.2% and inflation of only 0.7% and a strong
Euro is bad for exports.
ECB unexpectedly cut their central bank rates by 25 bps to 0.25% this Thursday, which significantly changes the prospects for Euro in the near and long term. Until now, the
European Central Bank has been a lot less accommodative compared to other developed countries. But this first step toward an accommodative stance may mean that we need to reconsider recent Euro strength and not be too surprised if it visits 1.3 handle sooner rather than later.

With the large sell off in the dollar recently (due to tapering concerns) it is rather undervalued, suggesting that the only way is up. Of course there will not be a bullish rally in the greenback without backup from data indicating the US is not in as bad of a position as initially thought by investors with the non-implementation of tapering in
September and the government shutdowns effect on US GDP. The late release of the unemployment rate and the Non-Farm Payrolls data are due on Friday the 8th Nov and these are likely to have a big impact on the dollar as they are likely to be the largest indications as to when tapering may begin (the unemployment target before tapering will begin is 6.5% and the forecast for Friday is 7.3%).

Yen
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The BOJ still shows no sign of slowing their bond buying program so in the long run, assuming nothing bad for the US dollar, the USD/JPY should increase further. Their most significant news scheduled for next week is probably the core machinery orders month on month, released on Wednesday with the previous result coming in at 5.4%.
The next monetary policy statement and BOJ press conference is due on Nov 21st.

MUTIS | Investment Division

Pound
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The past couple of months (since August 1st) have been extremely good for sterling in terms of the economic data such as manufacturing, services and construction PMIs often coming out better than expected and very often above the 50 level that indicates growth. These indicators (and others such as GDP, CPI and unemployment claimant change) all seem to be showing an increasing strength in the British economy which one could argue may be slow (since August the manufacturing PMI is up to 56 from 54.6, constructing PMI up to 59.4 from 57 and services PMI up to 62.5 from 60.2) but the long term strength in the pound is clearly present.
We must however still consider the possibility that the pound