As we get closer to the FOMC meeting next Wednesday, it looks like the currency war is starting to heat up. The Bank of Japan is “mobilizing its financial troops” by moving up its next policy meeting to Nov. 4-5, largely in response to the FOMC meeting on Nov. 3rd. This will allow the BOJ to react quickly to what the Fed ends up doing, which is bound to escalate the currency war.
Meanwhile, the BOJ kept rates unchanged and detailed their asset purchase plans, which the market has deemed insufficient to battle any potential US QE2 at this point. This morning the US dollar is weaker, as GDP figures are due out tomorrow and are not expected to be great enough to prevent QE2 from happening. The question at this point is not “if” but rather “how much”. So Yen has given back some of its recent weakness to the Dollar.
This has induced some risk taking in the market this morning, and the Kiwi is leading the pack even though the RBNZ kept rates steady at 3%. The threat of potential inflation (largely as a result of potential QE2) will keep them on alert but a further rate hike in 2010 is highly unlikely.
The Pound is seeing continued gains despite the fact that UK house prices declined to the lowest level in 8 months, perhaps still benefiting from the better than expected GDP report from earlier this week and overall Dollar weakness.
The Euro is mixed as confidence figures came in better than expected, but not good enough to buoy it past some of the better fundamental stories of other currencies. Except of course the Dollar.
In the forex market:
Aussie (AUD): The Aussie is higher as the weak Dollar is driving risk appetite and higher equities and commodities markets. The RBA recorded its largest ever loss on outside currencies it holds, as the Aussie appreciated 12% vs. the basket.
Kiwi (NZD): The Kiwi is higher even though the RBNZ left rates unchanged which was no surprise to the market. Higher export prices and rebuilding activity due to the earthquake should drive earnings going forward, balancing out a lack of consumer spending. (Click chart to enlarge)
Loonie (CAD): The Loonie is weaker against all but USD ahead of tomorrow’s US GDP report. A weaker than expected figure could impact the Canadian economy as the US is the largest importer of Canadian goods.
Euro (EUR): The Euro is mostly higher as European stocks are higher with corporate earnings beating estimates. In addition, PPI figures in France came in slightly higher than expected and business confidence figures beat estimates as well. However, it is largely Dollar weakness which is driving markets today.
Pound (GBP): The Pound continues to move higher after the GDP report from earlier this week despite the fact that house prices dropped to their lowest levels in nearly 8 months. The UK is effectively out of the currency war (for now) as they are expected to refrain from further easing. (Click chart to enlarge)
Dollar (USD): Once again weak Dollars are driving the market ahead of tomorrow’s GDP report. There is still tremendous speculation over the size and scope of QE2, so every data point from now until then will be considered significant. This morning initial jobless claims came in better than expected at only 434K, vs. the usual 450K we’ve been seeing.
Yen (JPY): The yen is showing some strength this morning despite the risk taking in the market due to Dollar weakness. The BOJ left rates unchanged which was no surprise and gave details of their asset purchase program, which if left as is would not be enough to combat further Dollar weakness. This is why they have moved up their next meeting, to attempt to respond to the Fed actions of next week. (Click chart to enlarge)
Central Banks around the globe are preparing for battle after what is likely to occur next week. This situation is akin to the Fed setting off a bomb, with no one certain of how big it might be and what the impact will be going forward.
The only thing certain is the uncertainty of it all. But make no mistake, there should be fireworks. My only hope is that this turns out to be a dud.
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