There is a lot going on in world markets recently and it seems like we are reaching a tipping point of some sort. With oil hovering around $100, rising inflation data around the globe, improving (but still historically high and unacceptable) employment figures and risk fears over government deficits and unrest in certain regions around the globe, it seems like a recipe for disaster.However, all of these “minor details” cannot seem to trump incredibly loose monetary policy around the globe. Most specifically, here in the US. The US dollar is already weak when compared to the commodity currencies and the safe haven currencies, including the Japanese yen and Swiss franc. Bernanke in his testimony yesterday and most likely today will continue to beat the accommodative monetary policy drum.
The stage is being set for even further Dollar weakness if any of these better-performing economies begin to raise rates. This would increase the rate differentials and make the US dollar even less attractive than it is now.
Even though both Canada and Australia appear to be benefiting from oil prices and increased economic activity, they are doing all they can to jaw-bone their currencies lower to no avail. Australian GDP figures showed an increase of .7%, in-line with expectations.
New Zealand has actually taken it one step further, with the Prime Minister actually calling for an interest rate cut, though this may be warranted because of the earthquake.
PPI data in the Euro zone showed a pretty large increase, and the UK reported higher home prices and PMI Construction figures, despite the protestations of the BOE head honcho who made extremely dovish comments in an attempt to hold back Pound strength.
Here in the US, we will have oil supply and demand figures today, which could have an impact if levels are noticeably off due to unrest in the Arab countries. We will also get the start of some employment data from ADP, which will set the stage for Friday’s NFP.
The MSCI Pac Rim Index was noticeably lower overnight, though equity index and commodity sentiment has flipped to positive. So we have early risk-taking in currencies.
In the forex market:
Aussie (AUD): The Aussie has rebounded from overnight weakness due to lower Asian stock market prices despite reporting in-line GDP growth figures. GDP showed a gain of .7% last quarter, keeping the YoY number steady at 2.7%.
Kiwi (NZD): The Kiwi has not rebounded from overnight weakness like the Aussie as the Prime Minister is calling for an interest rate cut in the wake of the earthquake which will have a major impact on the economy. Can’t say I blame him. (Click chart to enlarge)
Loonie (CAD): The Loonie is somewhat mixed today, seeing strength from higher oil prices and money exiting the Kiwi, yet tempered due to yesterday’s BOC dovish comments.
Euro (EUR): The Euro is higher across the board as PPI data showed producer prices increased 1.5% vs. an expectation of 1% for January, pushing the YoY figure to an increase of 6.1% vs. an expectation of 5.6%. This gives more ammo to those in the hawkish camp that the ECB may need to raise rates to combat inflation, but at the same time Portugal is being led toward the bailout chopping block. (Click chart to enlarge)
Pound (GBP): The Pound is also mostly higher after PMI Construction data posted a reading of 56.5 vs. an expectation of 52.9 and home prices were up causing BOE head King to make extremely dovish comments saying that he doesn’t see the inflation yet and that he thinks he will have to continue to write letters explaining the inflation story.
Dollar (USD): The Dollar is mostly lower as risk appetite has increased this morning ahead of Bernanke’s continued testimony to Congress. The ADP employment change figures are due out later this morning which could be a harbinger of Friday’s NFP. With Bernanke firmly at helm, accommodative monetary policy and weak USD should persist.
Yen (JPY): The Yen is weaker as risk appetite returned to the market after Asian stocks followed yesterday’s US stock market sell-off. There is no other significant news due out of Japan this week.
As I mentioned yesterday, there are a lot of little things that add up to a general market sentiment about the direction of the prospects of the global economy. However, US monetary policy is the current driver of growth.
This is taking place at the expense of the US dollar, which is falling in value and would be remarkably lower if not for geo-political risk around the globe.
There are three basic events that could happen to save the US dollar from devaluing significantly further: 1) Future uprisings and contagion in the Arab countries and Middle East, 2) Further problems with the Euro debt crisis, 3) Fed reverses accommodative policy and begins to tighten.
If things continue on their current path, then I could see situations 1 & 2 taking place. This would buy Bernanke time to allow his weak Dollar policy to play out while not having to tighten. However if either of these do not occur, then the lack of tightening could actually CAUSE either situation to occur.
Either way the US Fed wields entirely too much power around the globe and its ability to wreak havoc bother here and abroad is mind-boggling.
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