Fed To Ease Slowly? At least that’s the rumor du jour and is providing the Dollar with some strength this morning despite the fact that US corporate earnings have by and large been pretty good. Yesterday, ECB President Trichet rejected Germany’s call to end bond purchases citing a still weak economy.
Slight risk aversion is the theme this morning, as both the Aussie and Loonie have backed away from parity with USD. This week, the Bank of Canada is expected to leave rates unchanged and the release of the RBA minutes in Australia is likely to show restraint.
In New Zealand, consumer prices came in lower but as expected, and UK home prices came in higher than expected. Yet the Pound is lower as a further stimulus is still on the table, and this week the BOE minutes will be released showing if there is any shift by policy makers. The government is also set to outline its spending cuts.
This all adds up to risk aversion in the markets, though it’s possible that currency and equity market correlations may diverge this week.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as Dollar and Yen strength are reducing demand for carry trades. Tuesday will be the release of the RBA rate policy meeting minutes which are expected to show a cautious outlook to rate hikes.
Kiwi (NZD): The Kiwi is lower as CPI data showed prices rose 1.1% as expected vs. a .2% rise last quarter. Nevertheless the YoY number came in as expected at 1.5%, which was lower than previous targets of 1.7%. While this number is “pretty good” in light of the recent economic problems and increased taxes, it will not be enough to move the RBNZ at the next rate policy meeting.
Loonie (CAD): The Loonie is lower as the market has increased its speculation that the BOC won’t raise rates at Tuesday’s rate policy meeting. In addition, lower oil prices due to mild risk aversion have caused the Loonie to pull further away from parity with USD. (Click chart to enlarge)
Euro (EUR): The Euro is down as Dollar strength is pushing demand for the common currency lower. Comments yesterday from ECB Head Trichet signaled that he is not ready to remove bond purchases as the economy is still fragile. There’s not a lot of news for the Euro this week so expect it to trade on anti-Dollar sentiment.
Pound (GBP): The Pound is lower despite the fact that asking prices for homes came in higher than expected. The BOE rate policy meeting minutes are due out on Wednesday; and further monetary easing may be the only hope to avoid the double dip as the government appears committed to reducing spending, according to a former policy-maker. (Click chart to enlarge)
Dollar (USD): The Dollar is showing some strength this morning as the market is guessing that the Fed may gradually ease into further monetary easing, rather than just charging right in. There’s not a lot of economic data on tap for the US this week, but just about every Fed governor is due to speak on the economy. This could make things volatile, as there is no telling what or when something might be said.
Yen (JPY): The Yen is showing some strength due to risk aversion as the fears of further BOJ intervention have dissipated. A near-term bottom vs. USD may have been established. (Click chart to enlarge)
This week is long on talk and short on data. This comes ahead of this weekend’s G-20 meeting in South Korea, where the growing currency wars are bound to be a major topic of conversation. Whether anything actually gets done is another story entirely.
Meanwhile, I see no fewer than 15 banker/policy-maker types set to speak this week on various economies around the globe. My guess is that this will be intended to induce some risk-aversion as the fear card gets played to halt the one-sided movement of the forex market of late.
The Dollar is due to strengthen and the risk currencies are due for a pullback as the moves may have come too far, too fast. However, this does not change the longer-term trend and may actually present buying opportunities. The threat of further monetary easing by the Fed is still the “elephant in the room” and will be the primary driver of the currency markets going forward.
I am expecting the Pound to pull back some, but the Euro will continue to trade opposite the Dollar. The commodity currency countries are expected to maintain a dovish rate stance despite potential inflation as global economic uncertainty persists, so Dollar strength could continue throughout the week.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
To follow these events live with a free, real-time practice account, click here! Don’t miss out on the world’s fastest growing market!
Tags: account, AUD, Aussie, blog, cad, course, currenc, currencies, currency, currency trading, dollar, dow, economy, EUR, Euro, forex, forextrading, fx, fxedu, gbp, Il, jpy, market, Mike Conlon, nzd, practice, ssi, time, trade, USD, Yen