After the long weekend here in the US, the markets have started out decidedly in risk aversion mode. On a day that is light of economic data, concerns over European debt have picked up as bond spreads have widened on both Irish and Greek debt. Questions over capital ratios for the some of the European banks are not new, yet somehow this “news” is making its way to the headlines.
In addition, German factory orders unexpectedly weakened as demand wanes amidst global turmoil.
Overnight, Australia made no changes to interest rates as expected, citing weakening global growth, particularly here in the US. In addition, new PM Gillard has been confirmed and remains committed to taxing mining profits.
The Japanese Yen is the biggest gainer as the BOJ left rates unchanged and did not make any further statements regarding Yen intervention. The Yen is now at a new 15-year high vs. the Dollar as speculation of further US quantitative easing could cause further Yen strength.
In the forex market:
Aussie (AUD): The Aussie is lower as the RBA left rates unchanged overnight at 4.5%. Risk aversion in the markets has added to weakness as construction spending declined for the third month in a row. New PM Gillard’s push for a mining tax may be seen as negative. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also lower on risk aversion after last week’s earthquake in New Zealand’s second largest city rocked the country. However, this event is now being seen as an economic positive for the country as it will create jobs to rebuild. So GDP will likely come in a tad lower, and rates will remain unchanged.
Loonie (CAD): The Loonie is mostly lower as oil is lower to 73.25 and the sentiment over the global economic slowdown is causing reduced demand for risk currencies. However, tomorrow’s interest rate decision has the market divided as a slight majority of analysts see the BOC raising rates to 1%. It will be interesting to see if the threat of a global economic slowdown is enough to keep policy unchanged.
Euro (EUR): The Euro is lower across the board as European debt concerns come back into focus. In addition, German factory orders declined 2.2% vs. an expectation of a gain of .5%. This is causing renewed fears of the “old double dip” to heat up, although I’m not certain what exactly has caused those fears to increase. Perhaps the benefit of a lower Euro is welcome news enough.
Pound (GBP): The Pound is mixed this morning, tracking higher vs. the risk currencies and Euro. This comes ahead of Thursday’s rate policy meeting where the BOE is expected to leave policy unchanged. Retail sales came in higher as back-to-school shopping helped consumer demand. It will be interesting to see how the BOE justifies higher inflation in light of dovish policy. (Click chart to enlarge)
Dollar (USD): There’s no real news for the Dollar today but tomorrow will bring the Fed release of the Beige Book economic report. I can’t imagine there is anything encouraging to report, and if there was I’m not certain anyone would believe it. Meanwhile, the President is putting forth a new economic band-aid in the form of temporary tax breaks for business, which again is likely to fall short of accomplishing much. The Dollar is getting a boost from its safe haven status.
Yen (JPY): The Yen continues to move higher vs. the Dollar and I think the Japanese are starting to realize that there isn’t anything they can do about it. Not only is US opposition to Yen intervention likely, but calls for further quantitative easing from the Fed would almost certainly cause further Yen strength. Overnight, the BOJ made no changes to monetary policy after its token injection of liquidity at the emergency meeting from Aug. 30th. (Click chart to enlarge)
As the problems in the world economy reach center stage, it is becoming more apparent that fear around the globe is likely to persist for some time. Even though there are some good economic stories around the globe, there are some equally bad ones as well.
This is as much a crisis of confidence as it is of any one factor. Sure we know about the debt problems in Europe, yet bond auctions have been going off with a hitch. Could that change in the future? Absolutely. And in fact the market may demand more in the way of interest to continue to lend to troubled nations.
But until that happens, I don’t see any more of a problem today than any other day. As China continues to divest itself of US dollars, money will continue to find its way to areas that need it.
Emerging economies are the beneficiary right now of economic weakness from the Big Boy economies, however domestic demand needs to be encouraged to balance out global trade.
Japan is one nation where this couldn’t be more appropriate, and now with a stronger Yen they will have an opportunity to pick up some of the slack. For the US can no longer be the buyer of last resort, as both government and consumer balance sheets are tapped out.
The sooner the world realizes this, the better.
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