The U.S. dollar has had the gains it scored in North America yesterday (with the help of stronger than expected data) returned, except against the pound, which remains on its back foot. News that S&P was changing its rating outlook for Portugal from negative to stable may have helped spur some euro buying. However, the wider than expected Australian trade deficit (A$1.057 billion vs consensus of A$500 million) did not stand in the way of the Australian dollar's recovery. Together it would suggest that the price action is more about position adjusting than the news stream.
Sterling's heaviness is consistent with this theme as well. Of the three major central banks that were meeting today--the BOJ, the ECB and BOE, it is only the BOE where there is a close call. At Shirakawa's last meeting as Governor, there was little doubt that the BOJ would stand pat and that more measures will be taken next month when the new BOJ team is in place. The new steps are expected to focus on increasing long-term JGB purchases.
There is some thought that the ECB could cut the repo rate, but it is a minority view. Most participants appear to share our assessment that the new staff forecasts will likely trim forecasts for growth and inflation and this will put the pieces in place for a cut in Q2. There is not a strong sense of urgency. Officials knew and had embedded in their forecasts a weak start to the year and they have not been disappointed. The EONIA is at 7 bp and is anchored by the zero deposit rate. That is more important than the 1-week repo rate. The Italian political situation is far from worked out, though Italian asset prices continue to recover from the hiccup on the initial news.
News that German factory orders collapsed 1.9% in January will raise doubts about the strength of the recovery in the euro area's largest economy in Q1 after the 0.6% contraction in Q4 12. The consensus had expected a 0.6% increase in orders. It also points to weaker than forecast industrial output, which will be reported tomorrow.
The Bank of England, on the other hand, wants to ease. The Governor voted to increase gilt purchases last month and in a rarely seen event outside of the BOE, he was outvoted. Not only was he outvoted, but he likely knew he would. We suspect he voted last and knew only two other MPC members had agreed. On the outside chance he voted first, he would also have known how the vote was to go.
The more the Tory government sticks to its efforts to tighten fiscal policy, the more pressure there will be on the central bank to ease monetary conditions. Cameron and Osborne have decided the best person to do that is Canada's Carney. However, as it was ultimately a Labour government that granted the BOE its independence, the Tory government, according to reports, is considering changing the BOE's charter that will allow even greater latitude, such as giving it a second mandate like the Federal Reserve or allowing it more time to get inflation back to the 2% target. Ironically, Japanese officials have toned down their rhetoric of changing the BOJ's charter.
For its part, the U.S. reports data that typically do not move the market. The January trade balance is expected to have deteriorated, but for GDP purposes one needs to strip out the impact of prices and compare with Q4 12. Recall in December, the U.S. reported record petroleum exports. Non-farm productivity and unit labor costs are a function of the GDP data. The small upward revision to Q4 GDP points to a smaller decline in productivity and a slightly smaller increase in unit labor costs. Weekly initial jobless claims will not mean much to the markets ahead of Friday's national report, but the 4-week moving average continues to track the S&P 500 fairly closely.
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