Today’s FX View from IB:
Despite soothing comments regarding the low likelihood of any change in the policy stance at the ECB during the first half of 2010 and a larger than predicted demand for cash at its final one-year tender, the euro is rising this morning against the dollar – perhaps as suggested yesterday – because the bearish pendulum swung a little too far.
Euro – The euro has risen to $1.4575 after reaching a two month low yesterday at $1.4504 against the dollar. Demand from banks at the 12-month cash tender, the final at this duration, was expected to be sharply reduced to around €75 billion. However, demand was greater and the ECB says that banks bid for €96.9 billion and the cost will be indexed to the average minimum bid at its main refinancing operations. This means that should the ECB choose to raise interest rates during the life of the loans, banks will bear the higher cost of borrowing.
Austrian central banker and ECB member, Ewold Nowotny today downplayed the likelihood for a change in monetary policy over the next two quarters on account of likely low inflationary pressures. Consumer prices are predicted to rise 1.3% next year and 1.4% in 2011, which means the 2% target is potentially safe, which is why Mr. Nowotny is trying to downplay any contrary expectations.
Data supportive of the euro despite the downplay comments on rates came in the form of strong purchasing manager data for both service and manufacturing sectors, which rose to the strongest in two years. Recently the bigger driver for currency movements has not come in the form of raw data, rather it has come from commentary or perceptions illuminating the prospects for an official end to ultra-low monetary policy. Accompanying today’s PMI data was a report showing extremely tepid inflation data with the core annual CPI rate showing a 1% increase for November – half the official policy target threshold.
U.S. dollar – We’re left wondering whether or not investors were buying the dollar earlier in the hopes that the Fed’s afternoon statement today will show any changes. If anything it is likely to lay on thick that growth remains moribund, just as Mr. Bernanke did just days after the November jobs data. The recent increase in market rates will not be sitting comfortably with the FOMC that has fought tooth and nail to keep the monetary spigots fully open. The issue of credit to small businesses remains a crucial piece of the jigsaw here. The dollar index is lower this morning by 0.25%. The dollar faces the hurdle of two reports early on Wednesday in the shape of November housing starts and consumer prices. Economists predict that builders broke ground on 574,000 last month.
Aussie dollar is just about the only major not making gains against the U.S. dollar on Wednesday. It would seem now that the best days for a currency are those during which investors perceive a central bank to be actively holding the “up” button in the monetary elevator. Once they let go the currency loses its momentum and appeal. What investors are losing site of, perhaps in the short term, is indeed the longer term appeal afforded by the huge yield cushion. With Aussie short rates at 3.75% it still compares to practically zero on the U.S.
However, the Aussie appeal took a couple of hits midweek after a weak showing for third quarter GDP, which came in at a 0.5% year-over-year gain and less than the expected 0.7% increase for growth. The deputy governor at the RBA delivered a speech in which he made reference to monetary policy as being back in the “normal range.” The market took the chance to further reduce the prospects of more interest rate increases from the RBA and sold the Aussie back to 90 U.S. cents.
Japanese yen – The Japanese stock market rose overnight after Nikkei news reported that an accord aimed at boosting the capital across the banking system would only be rolled out at a snail’s pace giving its major banks an entire decade to replenish capital Banks have raised around $20 billion during 2009. The relief saw individual banking stocks rebound as much as 15% in some cases as investors digested the prospects for less onerous rules. The yen was unchanged against the dollar and stands at ¥89.59.
British pound – The pound continued to rally against the dollar and the euro following an unexpected decline in the jobless count, making it the first such positive reading since February 2008. The drop of 6,300 in the number of unemployed continues the recent trend across major economies where job creation surprised to the upside. Today’s data stirs thoughts that the British economy might just be recovering faster than previously forecast. The prediction ahead of the number was for 12,500 jobs lost throughout November. The pound added to $1.6365 and appreciated against the euro, where the single currency today buys 89 pennies.
Canadian dollar – Unlike the Australian dollar the Canadian isn’t suffering from disappointing investors hoping for eternal interest rate expectations. As a commodity dollar it continues to perform well and with both a decline in the greenback and a rush of action surrounding commodity prices in early New York trade the loonie is on the rise to 94.34 U.S. cents.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.