By Mike Conlon
Raise rates now!
Or so exclaimed BOE policy maker Andrew Sentence, as the lone dissenter of the UK Monetary Policy Committee. The minutes from the rate policy meeting were released and were surprisingly hawkish, as the committee was “surprised” by recent economic strength and the fact that inflation has remained above the government target of 3%. The market will be closely watching economic data coming out of the UK in the ensuing weeks for signs that UK economic strength may bring about a rate hike at the next meeting.
Otherwise, today is largely devoid of market-moving news. Yesterday the US stock market rallied after last week’s sell-off on the back of good corporate earnings and decent economic data. The Nikkei followed suit overnight, but the Yen broke from its usual inverse correlation, and is actually sporting strength this morning. So a pullback or pause after yesterday’s rally would not be uncommon, but there is little news that would cause a sentiment shift.
There are also some rumblings in the market about German economic strength as an exporting nation and how they are becoming similar to China in that they have an economic trade surplus. While this alone isn’t a bad thing, the call for German domestic demand to increase may be falling on deaf ears. I discussed the idea of “Chermany” in a previous blog article; that Germany has an “unfair” advantage due to weaker countries in the EU which hold the Euro low, similar to China’s Yuan peg. You can read the article here.
In the forex market:
Aussie (AUD): The Aussie is lower as the Westpac index of leading indicators came in lower than expected, for the third month in a row. While this shows a sign of potential economic slowing; this may be exactly what Australia is hoping for. In addition, speculation that Japan will not intervene in its currency is gaining traction. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is higher this morning, despite the mixed Yen strength and is likely the result of money flows leaving the Aussie in favor of the Kiwi.
Loonie (CAD): The Loonie is also higher this morning despite lower oil prices due to Aussie weakness and ahead of Canadian CPI data due out on Friday. A higher than expected reading could increase speculation about forthcoming rate hikes.
Euro (EUR): The Euro is mostly lower despite the fact that construction output figures rose for the first time in nearly 6-months. The idea of “Chermany” is starting to make the rounds but at this point I think the EU is content to allow Germany to grow unfettered to counter-balance the rest of the Euro zone weakness. Spain and Ireland both had successful bond auctions yesterday.
Pound (GBP): The Pound is the big winner this morning as the minutes from the rate policy meeting showed a surprisingly hawkish tone. Should economic data continue to be strong, the BOE may be forced to make monetary policy less accommodative. (Click chart to enlarge)
Dollar (USD): The Dollar is mostly lower in absence of any major news. The overall sentiment surrounding the Dollar is negative; however pockets of risk-aversion will likely keep it from freefall. In addition, tomorrow’s Philly Fed survey and initial jobless claims figures will provide further info into the health of the US economy which, in my eyes, is decidedly weak.
Yen (JPY): The yen is showing some strength today as speculation surrounding currency intervention is waning, despite the calls from a lawmaker to immediately intervene and weaken the currency to 95 to the Dollar. (Click chart to enlarge)
Today is one of those days where the lack of market-moving news allows big position players to operate freely. Also expect the performance of the US stock markets to affect the dollar as the trading day continues. The stock markets have opened lower despite decent corporate earnings today, which is more than likely a technical pull-back than a shift in sentiment.
As sentiment shifts around the globe from region to region, follow the money. Aussie is being sold because economic growth looks tepid going forward. Pound is being bought because the of a hawkish monetary policy meeting. Yen is being bought as intervention fears are subsiding, and Dollar is being sold because the US economy stinks.
So while there is still risk in the markets, there are always places to park your dough. The key is identifying who has the best prospects for growth, and that’s what I try to find for you each and every day!