On the heels of yesterday’s interest rate policy meeting, the Loonie is seeing continued strength as the BOC set the stage for future rate hikes. The economy has been strong and while unemployment is a bit high, inflation fears are beginning to heat up as typically inflation will rise faster in Canada than in the US. This is taking place despite the risk aversion in the market this morning.
There is slight risk aversion in the forex market as the IMF/EU/ECB meetings with Greece are taking place. While this whole situation has become a comedy of errors, let’s hope it doesn’t end in Greek tragedy. Nevertheless, this drama will continue to play out until the final act. The Euro is lower this morning as a result.
More positive news came from the UK, as jobless claims fell more than expected, showing signs that the UK economy may be on the road to recovery. Minutes from the BOE policy meeting showed unanimous consent to keep rates steady, though as mentioned yesterday, there is some concern that inflation is starting to show up outside of accepted target rates.
Meanwhile, the US is picking up support in its quest to see a strong Chinese Yuan on a day which is devoid of major market moving news for the US.
In the forex market:
Aussie (AUD): The Aussie is slightly lower this morning on risk themes however if is near 6-month highs. In general the global economic news has been strong as of late, but risk coming from the Euro zone and the issue of Chinese Yuan re-valuation is weighing on investors. In addition, an index of leading economic indicators came in at 18-month highs, demonstrating further signs of Australian economic strength.
Loonie (CAD): The Loonie is stronger again this morning, trading at .997 vs. USD. Yesterday’s interest rate policy meeting has set the stage for future rate hikes in a straightforward manner, prompting some analysts to wonder why they didn’t just raise rates yesterday. Barring any further major risk-events, I expect the Loonie to trade at or below parity with USD.
Kiwi (NZD): The Kiwi is slightly lower on risk aversion and signs of a muted economic recovery. Tomorrow will bring consumer confidence figures which may give insight into near-term economic growth.
Euro (EUR): Debt talks begin today between Greece and the IMF/EU/ECB with how to handle the potential bailout. Credit-Default swaps are at a record high, showing signs that the market believes a default is imminent. It doesn’t help that the Greek finance minister is saying that Greece could activate the aid package before the talks are even over. Signs of contagion in the region are also picking up, with Portugal as the most likely to come under fire. Equities markets are lower in Europe today.
Pound (GBP): The Pound is higher this morning as jobless claims fell more than expected, showing further signs of economic recovery. In addition, the MPC minutes showed unanimous support for the no rate hike, yet the threat of higher-than-targeted inflation figures could cause the BOE to act. Retail sales figures are due out tomorrow, followed by GDP figures on Friday.
Dollar (USD): The Dollar is marginally higher this morning on risk themes, despite the slew of “good” corporate earnings reports. I suppose that companies that have trimmed the fat by firing workers should be reporting good earnings, but that’s a conversation for another day. In addition, big bank earnings once again beat expectations—today it’s Morgan Stanley—as the free money the Fed supplies these banks conveniently makes its way to trading desks on Wall St. and not Mom-and-Pop on Main St. The stock market futures are slightly higher, as are commodities.
Yen (JPY): The Yen is slightly lower as the mild risk-aversion to start the morning is not enough to cause the un-wind of carry trades. The Bank of Japan Deputy Governor was out saying that he sees “light at the end of the deflation tunnel”, and is expected to continue with accommodative monetary policy.
Today is a day marked by individual currency strength. Both Canada and the UK are strong, while the Euro zone is weak. Today can be classified as neither risk-taking nor risk-aversion. On days like today, use the individual currency fundamentals to guide your trading and keep an eye open for any changes to risk themes.
Without any major news to affect the forex market, take clues from both US stock market and both oil and gold. While the usual correlations may not be as strong as on other days, the disconnects can sometimes provide excellent trading opportunities.
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