Overnight, the RBA in Australia elected to leave interest rates unchanged and delivered a dovish economic outlook, which came as a surprise to some in the market. Citing weaker financial markets and economic uncertainty, the RBA did acknowledge that rates may need to rise in the future, though lower retail sales figures substantiated the decision not to hike.
In another surprise move, the Bank of Japan moved on interest rates as well. They actually lowered rates from a ridiculously low .1% to 0%, effectively paying no interest. A move like this is meant to encourage domestic demand, though I’m not certain how much of a difference this will actually make. Maybe they should have negative interest and actually charge investors who don’t spend. Desperate measures for desperate times if you ask me. In addition, they are going to increase asset purchases as well attempting to create a weaker Yen.
In China, PMI figures came in lower than last month showing that their economy may be slowing.
In the UK and EU, PMI figures came in better than expected though increased chatter about the deficits and debt levels of the countries in trouble have not had a negative effect on the Euro or Pound, which are the biggest gainers this morning.
Lastly, here in the US, Fed Chairman Bernanke called on lawmakers to consider rules on fiscal spending and said that higher taxes at this point in the recovery may be misguided.
So despite all of the negative sentiment surrounding the market, we are seeing some risk appetite with the lower Aussie as the only outlier.
In the forex market:
Aussie (AUD): The Aussie is lower across the board as the RBA kept rates unchanged at 4.5%. While the market was expecting a rate hike, the odds of that hike occurring were not overwhelming therefore losses in the Aussie may be only temporary as Yen and Dollar weakness encourage continued yield-seeking. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is higher as money flows from the Aussie to the Kiwi as risk appetite is still high. Weaker Yen and Dollar leave investors with fewer options for money flows, so equities, commodities, and high-yielding currencies benefit.
Loonie (CAD): The Loonie is also higher for the same reasons as the Kiwi, and is also catching an additional bid from oil at 82.25.
Euro (EUR): The Euro is the big winner this morning as PMI figures from around the region came in better than expected. However, retail sales were lower showing that domestic demand may be waning. In addition, Moody’s ratings agency is placing Ireland’s credit rating under review, and has said that Greece is on the right path if they remain committed to reducing their debt. (Click chart to enlarge)
Pound (GBP): The Pound is also higher this morning as PMI figures in the UK came in better than expected, posting a reading of 52.8 vs. the expectation of 51. This shows that UK may be turning the corner toward recovery.
Dollar (USD): Not a lot of news for the Dollar today, though Bernanke’s Q&A session yesterday hinted that further QE may be necessary. The bottom line is that a weak US dollar has been driving currency markets recently, pushing equities and commodities higher. Gold is near an all-time high at 1330.
Yen (JPY): The Yen is lower as the BOJ lowered interest rates to 0%. That’s right, 0%, essentially offering no interest on savings. In addition, they are going to increase their asset purchases to try to weaken the Yen, but may be fighting an uphill battle as US dollar weakness has been trumping BOJ actions. Yen is nearing pre-intervention highs vs. the US dollar. (Click chart to enlarge)
Well folks, I’m not gonna lie. Things are starting to look a little dicey despite the fact that the market is in risk-taking mode this morning.
An increase in non-coordinated government action has fast money moving in and out of different asset classes as nearly everyone wants a lower valued currency. As we know, this is not really possible for everyone to devalue or intervene. As the forex market is a relational market, when one currency goes down another has to go up.
This is providing some outstanding trading action and should continue provided one of these government actions doesn’t create structural problems.
The most recent trend has been Dollar weakness and thus Euro and Pound strength. As historic highs and lows are probed, expect there to be increased volatility.
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