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Similar to the euro, the British pound will likely weaken against the US dollar amid risk aversion in the first half of the year. Against the euro, the pound had gained for 3 consecutive years since 2009 although the magnitude has been declining. In 2011, EURGBP has been on a down trend since the EU summit as pessimism that EU finance leaders would not be able to derive effective measures to resolve the sovereign debt crisis has made sterling a safe-haven asset in the short-term. We do not expect this to continue this year as the UK has its own fiscal and economic problems to struggle. The disaster these might cause is not less than the debt problems in the17-nation region. An option to alleviate the economic problems would be monetary easing. Without the need of majority vote, the BOE may deliver more dovish stance on the monetary outlook than the ECB in 2012. This would then weaken the British pound.

Although UK’s GDP grew +0.5% y/y in 3Q11 after climbing only +0.1% a quarter ago, the underlying trend is not at all encouraging.

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Copper is up from its multi-month low at the 299.40, but the gains are seen as a correction (wave 4 in the fall from the Aug 1st high at 454.00), and with eventual new lows below 299.40 after (within wave 5, see daily chart below).  Note that copper has gotten a lot of attention recently due to its relationship with economic activity in China (and recent concerns about a slowdown).  Also, another downleg in copper fits the view of another potential selloff in “risk” markets, and upleg in the $ (see earlier sent email).  Currently, the market is down from the Oct 17th high at 346.35 (38% retracement of wave 3), potentially completing its multi-week correction, and suggesting new lows ahead.  So for now want to be short copper and would sell here (cur at 320.65).  But there is risk that new lows below 299.40 may be limited (see longer term below), so will use an aggressive stop on a close above the bearish trendline from early Sept (currently at 342.50/343.50).  Note too that even a break above there would not abort the view of new lows, but suggest a more extended period of consolidating first, and would be looking to resell higher if taken out.  Nearby support is seen at 316.50/317.50. Full article…

CEE markets were generally disappointed after the ECB did not announce any sizeable target for buying eurozone bonds. Currencies weakened and yields rose accross the region and as usual, the forint was the victim of this again. The EUR/HUF pair dropped from 300/€ to 308/€ by this morning and yields rose about 20-25bps accross the curve, which means that the long-end got close to 9.00%.

Third quarter growth figures were released in the Czech Republic and Hungary. The Q/Q data was strong for Hungary at 0.5%, while it was -0.1% Q/Q for the Czech Republic. In terms of the Y/Y change, Hungary remained unchanged from the preliminary fact at 1.4%, while the Czech figure was revised lower to 1.2% Y/Y from 1.5% Y/Y. There were also foreign trade data releases in Hungary and Slovakia.

In case of the former, the data was in line with expectations at a monthly surplus of €497m, while it exceeded expectations by large with €570m surplus in Slovakia due to double digit rise of export and a broadly unchanged import. Full article…

Dollar strengthened across the board last week as risk aversion dominated the markets on a serious of bad news from Europe, including poor bond auctions, surging yields and downgrades. DOW, FTSE and DAX all suffered sharp selloff and the developments turned near term outlook bearish and raised the prospect of new 2011 low before the year closes. A few weeks ago, we talked about the remote possibility of head and shoulder bottom formation in the dollar index and the index is now pressing the neckline resistance. Among the major currencies, Aussie was the weakest on deteriorating economy outlook in China. But Euro was taking up the weakest spot towards the end of the week.

Germany’s bond auction was the highlight of the week. The German government managed to sell just of EUR 3.644b of 10 year bunds today, way short of it’s maximum target of EUR 6b. Markets saw as a deep mistrust of Euro, which was even manifested in weak demand for German bunds. Spain Treasury sold EUR 2.978 of three- and six-month bills at sharply higher yields.

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EURJPY- While the cross continues to hold above the 104.95 level, its Sept 27’2011 high, risk remains higher towards its Monday high at 107.67 level.A convincing violation of here  will resume its corrective recovery and target further upside towards the 107.99 level, its Sept 09’2011 high and then the 109.95 level, its Sept 06’2011 high. Alternatively, a turn lower will bring further declines towards the 104.95 level, its Sept 27’2011 high. A reversal of roles is likely at this level with a loss of here opening the door for a move further lower towards  the 102.72 level. Further support lies at the 100.75 level, its Oct’2011 low and subsequently the 100.00/99.87 levels, its July’2010 lows. All in all,  though hesitating, EURJPY still maintains its corrective upside risk.

***Economic Data***
– (BR) Brazil Oct IBGE Inflation IPCA M/M: 0.4% v 0.4%e; Y/Y: 7.0% v 7.0%e
– (IC) Iceland Oct Unemployment Rate: 6.8% v 6.6% prior
– (MX) Mexico Sept Industrial Production M/M: +1.8% v -1.1% prior; Y/Y: 3.6% v 3.1%e
– (US) Nov Preliminary University of Michigan Confidence: 64.2 v 61.5e

– US equity indices are up sharply this morning another burst of risk appetite that has followed the formal appointment of the new Greek government, including Papademos as PM, and the passage of austerity measures by the Italian Senate. Note that the latter development sets Italian PM Berlusconi up for resignation on the lower house’s passage of the austerity bill, which is expected for Sunday. Note that US bond markets are closed for Veterans’ Day while volumes in equity markets are well below average, helping to further exaggerate moves to the upside. On the data front, the preliminary November U of Michigan Confidence reading was relatively strong, adding more optimism to the picture. Full article…