The Dollar is seeing some strength today despite mild risk aversion in the markets. Bond vigilantes are investors who are dissatisfied with either monetary or fiscal policy and thus they sell bonds in order to encourage higher yields.
I think the recent activity by this group can be a backlash to BOTH monetary and fiscal policy after the deal on tax cuts was announced yesterday. There are obvious attempts at trying to spin this phenomenon to support one political view or another but in the end it doesn’t really matter.
What does matter is that regardless of which policy they are protesting, it is apparent that there are major risks facing the US and thus the global economy and as a result they are demanding higher yields in order to compensate for that risk.
Stock markets are mostly flat, but commodities are seeing a big sell-off.
In the Euro zone, yesterday Ireland agreed to the budget reform and austerity measure designed to get them the IMF bailout funds. In Germany, industrial production increased, though exports fell off.
Also of concern is that this weekend, China will be reporting inflation figures on Saturday and may raise interest rates at that point in time to slow down their economy which could induce further risk aversion.
In the forex market:
Aussie (AUD): The Aussie is mostly lower despite increased lending figures ahead of tonight’s unemployment rate data. The Aussie is also taking a hit due to lower precious metals prices.
Kiwi (NZD): The Kiwi is also lower across the board on lower commodity prices ahead of this afternoon’s RBNZ rate policy meeting where it is expected that rates will remain unchanged at 3%.
Loonie (CAD): The Loonie is faring the best of the commodity currencies as oil is not getting hit as badly as metals. In addition, housing starts came in better than expected.
Euro (EUR): The Euro is mostly lower as anti-Dollar sentiment is weighing on the common currency. German industrial production figures came in at 11.7% YoY vs. an expectation of 10%, showing signs that the German economy is still performing well. Irish acceptance of austerity measures brings stability to region—for now.
Pound (GBP): The Pound is quietly gaining as recent, decent economic data has induced a stealth rally ahead of tomorrow’s BOE rate policy meeting where it is expected that both rates (.5%) and bond purchases (200B) will remain steady.
Dollar (USD): Expect the talk to heat up over which policy has brought out the bond vigilantes en masse. The truth of the matter is that it is ALL economic policies that have investors demanding more interest due to heightened risk.
Yen (JPY): The Yen is weaker across the board ahead of Japanese GDP figures due out later tonight. News that China increased its bond holdings and has renewed interest has helped weaken the Yen further. However, a potential Chinese slowdown could reduce demand for Japanese exports despite the weaker Yen which could cause a near-term reversal.
You may have asked yourself before, “who the heck is buying US debt at practically zero interest?” Well you now know that the answer is NOT bond vigilantes.
In fact, there is talk that the “new” bond vigilantes may actually be foreign governments fed up with US economic policies. When risks increase, investors should receive more compensation for lending under those conditions.
This could be setting up for some interesting economic scenarios going into year end, and one of the best ways to play this activity is through the forex market. If you are not involved in forex, then you may be missing the boat!
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