This morning’s US GDP figures came in as expected, giving the market no reason to think that QE2 may be either at the larger or smaller end of the range of speculation. Earlier in the morning, the Dollar was strong as the expectation may have been that the GDP figure would beat expectations as had happened in the UK. No such luck.
So for now, it looks like it’s full steam ahead, as the Dollar has been giving back earlier gains and is about to go negative. Contributing to Dollar strength and risk aversion in the market was the overnight news that deflation in Japan is still rampant, and household spending figures came in much worse than expected. This will mostly likely be attributed to a stronger Yen that has derailed exports, and several companies missed earnings estimates sending the Nikkei down 1.75% overnight.
In the EU, a summit in Brussels produced a mechanism to permanently deal with debt crises, which contributed to higher yields for Greek debt. In addition, German retail sales figures came in much lower than expected, declining 2.3% vs. the expectation of a .5% rise.
In the UK, mortgage approvals rose faster than expected, as did consumer credit figures.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion and the interest rate outlook which is expected to keep rates steady at next week’s rate policy meeting. In addition, lower Asian equities have reduced demand for Aussie carry trades.
Kiwi (NZD): The Kiwi is actually higher as the Aussie’s loss is the Kiwi’s gain. Overnight, NZ reported better than expected exports, and even though the trade balance figures were less than expected, they still bested last month’s readings.
Loonie (CAD): The Loonie is holding up surprisingly well as their monthly GDP figures came in as expected at .3%. Even though risk aversion and lower stock index futures and commodities are driving markets lower, the Loonie is benefiting from weaker fundamentals everywhere else.
Euro (EUR): The Euro is weaker as the Euro zone unemployment rate came in at 10.1% as expected, but at a 12-year high. In addition, European CPI estimates came in hotter than expected at 1.9%. If both inflation and unemployment are rising in the EU, the ECB could be in a pickle as to what to do about rate policy.
Pound (GBP): Unlike the Euro zone, things appear to be just jolly in the UK—at least for now. Overnight, consumer confidence figures came in better than expected, as both mortgage approvals and consumer credit expanded at a better than expected pace. (Click chart to enlarge)
Dollar (USD): The Dollar is mixed this morning as risk aversion and individual currency fundamentals are battling for market supremacy. Aussie and Euro weakness are trumping risk themes, even though stocks are set to open lower. GDP figures came in as expected at 2%, and personal consumption figures came in better than expected which could be a positive for the economy.
Yen (JPY): The Yen is showing strength again and the market is testing the resolve of the BOJ as to whether or not they will intervene in the currency again. Industrial production figures came in lower than expected, as did household spending figures. CPI data showed deflation slightly higher than expected, and the recent strength of the Yen is most likely to be blamed for said data. I think the BOJ is trying to hold on until the FOMC meeting next week, but a test of 80 vs. USD is likely to invoke some sort of action. (Click chart to enlarge)
So today is a total mixed bag, with Kiwi, Pound, and Yen strength, followed by Aussie and Euro weakness. Today the Dollar is taking a backseat to its counterparts, as the risk picture is unclear at this moment.
However, the US GDP figures provided neither relief nor concern regarding next week’s FOMC and the launch of QE2. The question is still unclear as to the size of it. Nevertheless, Central banks stand ready to act to attempt to counteract the negative effects of QE2, especially if it causes the Dollar to weaken considerable.
Right now, the Dollar is near recent extremes against many currencies, with USD/JPY near 80, AUD/USD and USD/CAD near parity, GBP/USD approaching 1.60, and EUR/USD just below 1.40. Just from a psychological perspective, it seems as though these levels have become areas of support and resistance which has painted a technical picture of the markets.
When I look at these levels I want to believe that the Dollar will not go below some of them, yet I’m having a hard time believing that the Fed might act responsibly. Meanwhile, the markets are setting up as if hyperinflation is just around the corner.
The Fed needs to become aware of the unintended consequences of its actions, and this is most likely going to go down as one of the all-time blunders.
If this doesn’t scare you before Halloween, I don’t what will!
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