Yours truly wasn’t the only one feeling the ill-effects of the Easter holiday, as both European and Australian markets were closed yesterday. However, with the holidays behind us, the forex market has wasted no time in digesting news which has sent the market into risk-aversion mode.
We did start the morning higher as the RBA raised rates in Australia to 4.25% for the fifth time in six months. And earlier this morning, the Loonie reached parity with the US dollar before pulling back. Last Friday’s NFP report was sort of a dud, as the closure of stock markets helped to reduce volume. While the number of jobs gained is encouraging, the US government still has a long way to go as the fiscal stimulus is over and the jobs “created” by the census are short-term in nature.
Meanwhile, oil and gold have traded higher to 86.5 and 1127 respectively, showing signs that commodity inflation may be ready for another run if US rates continue to stay extraordinarily low. The Dow Jones came close to breaching 11K, only to be turned back 25 points short.
And lastly, the continued news out of Europe and the UK has caused weakness in their respective currencies and will continue to weigh heavily until there is resolution.
In the forex market:
Aussie (AUD): The Kiwi is higher this morning against all but the Yen which is showing technical strength despite the risk-aversion mood the market is in this morning. The RBA raised rates to 4.25%, as they feel that both housing and commodity inflation is starting to rise. The return to “normal levels” is tantamount to the RBA as Australia is showing a balanced economy despite the ongoing worries of a slow US economic recovery and a potential China slowdown.
Loonie (CAD): For those who have followed this blog closely, you will notice that I have replaced the Kiwi with the Loonie in the “ladder of strength” as I believe the Loonie is set to further out-perform the Kiwi in the near future. Earlier this morning, the Loonie reached parity with USD as oil prices advanced beyond 86.5 and as Australian rates were hiked. The only news of significance for the Loonie this week is Friday’s unemployment report.
Kiwi (NZD): The Kiwi got bumped down a notch as they could only ride the Aussie’s coattails for so long. Business confidence has slowed in New Zealand as weak consumer demand has reduced hiring and curbed corporate profits. New Zealand appears to be in no rush to raise rates, which could hold steady well into the second half of the year.
Euro (EUR): The Euro is lower this morning as renewed fears over Greece’s ability to raise enough capital to service its debt have arisen again. In addition, tomorrow the Euro zone will report its GDP figures and will have its rate policy meeting on Thursday which is expected to remain unchanged.
Pound (GBP): The pound is lower this morning as the date for the spring election has been set for May 6th, and renewed fears of a “hung Parliament” have resurfaced as uncertainty over whether or not a political majority will be elected. It is widely feared that a hung Parliament will not have the political will to reduce UK deficits which have been weighing heavily on UK economic recovery. In addition, the UK will have its GDP estimates on Thursday, as well as the BOE interest rate policy meeting which is expected to leave rates unchanged.
Dollar (USD): The dollar is showing some strength this morning as risk-aversion plays and European weakness are dominating the morning. This week are going to get a lot of Fed chatter, as the FOMC policy meeting minutes are due out today, followed by a bevy of speeches from various Fed governors on Wednesday. This could give some insight into “Fed logic”, which many liken to “jumbo shrimp”– that is—an oxymoron. But don’t count on it.
Yen (JPY): The yen is higher across the board this morning as it is pulling back from recent weakness as risk-aversion is slowing the market. The Japanese interest rate decision is due out tomorrow and is all but certain to remain unchanged. However, signs that economic recovery is taking place are overshadowed by rampant deflation, and the ongoing battle between the BOJ and the government is bound to produce no “winners”.
Outside of the Aussie rate hike, not much to get excited about today as far as economic news is concerned. There is still considerable risk in the market place and now politics is starting to really become a drag on individual economies.
Those economies that have the political will necessary to take appropriate actions will be rewarded, and those who let politics gets in the way of returning to sound fiscal and monetary policy will be punished. Because at the end of the day, it is fiscal policy that can be controlled; more so than monetary policy.
As a result of the economic crisis, monetary policy has become reactive as opposed to proactive as the whims of politicians may have been toxic. Only time will tell who are the winners and losers. Until that picture becomes clearer, I am inclined to err of the side of caution.
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