There has been much debate over whether world economies are going to see inflation or deflation. I think we’ve been in a deleveraging situation where prices have contracted based on supply and demand and increased saving since the start of the financial crisis until now.
With every passing day that the world financial system doesn’t collapse, consumers become more emboldened to spend their money which in turn helps increase economic activity. Of course historically low interest rates around the globe and money-printing from various regimes have debased currencies and destroyed value.
But now that excess money has been floating around the globe and balance sheets are being shored up, it seems likely that we are bound to see some sort of inflation. That appears to be what the market is thinking this morning as commodity currencies are higher despite the fear in the market over the on-going Euro situation.
There is little region specific news to drive the forex market today, but the G-20 is still meeting to discuss world economic issues with the top to priorities being how to address the EU problems, and what to do about China’s pegged currency. May will be a challenging month as the UK elections and Greece’s next debt payment is due.
In the forex market:
Aussie (AUD): The Aussie is higher this morning as commodities are higher as the market is preparing itself for inflation down the road. Oil is above $85 and gold is trading just north of $1155. World stock markets are higher and risk-taking appears to be on, yet there is increased fear over an EU resolution.
Loonie (CAD): The Loonie is higher on commodities prices, particularly oil as fears out of the EU are lessening as we get closer to the US stock market open. If Greece can secure financial aid and the threat of contagion is contained, then the Loonie looks poised to move higher as inflation fears will challenge the bank of Canada to raise rates.
Kiwi (NZD): The Kiwi is the biggest gainer this morning, as it has been beaten up the most as of late on risk aversion. Last week’s encouraging economic news has brought back demand for the Kiwi as carry traders seek yield. As the Kiwi has been under-performing the other commodity currencies, it was ripe for a bounce like the one we’re seeing this morning.
Euro (EUR): Is anyone else as tired of the Euro as I am? This Greek bailout package needs to be rectified very soon, and EU leaders should take a course in public relations. It’s obviously lower this morning.
Pound (GBP): The Pound is higher this morning as home price data came in showing growth, however it should be noted that the increase was the slowest in three months as more supply hit the market. At this point I think the market will take any growth it can get, even if slightly disappointing. This comes in addition to the “election speculation” that has captivated the market and will continue until it is decided on May 6th.
Dollar (USD): The Dollar is seeing some strength this morning despite the gains for the commodity currencies. Much of the gains are on anti-Euro sentiment, as the Euro is known as the “anti-dollar”. However, it has been giving back some gains this morning which I suspect could continue barring any negative news from the G-20.
Yen (JPY): The Yen is weak this morning as the fuel for commodity currency carry trades is picking up. Even the Euro has showed gains against the Yen. Another catalyst for Yen weakness is coming from the Asian stock markets which had excellent gains in the overnight session, as exports have been up in the region.
On a day which is devoid of news, the market will return to the general themes that drive it. However, as some of these themes begin to become old, the market looks to themes for its answer. With all of the encouraging economic data coming out around the globe including corporate earnings, signs that the global economy is not only stabilizing but picking up are becoming more prevalent.
While there is still risk in the market, the “light at the end of the tunnel” in near, as the UK elections will be resolved in 2 weeks, and a decision on Greece should be on the table before mid-May. If these events can be successfully negotiated, then expect the market to turn its eye toward the inflation debate.
Of course as this view starts to heat up, then the market is susceptible to a whole other “can of worms”. For now, I’m just going to go with the flow and wait to see what happens.
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