Today is a day marked by spin-jobs from the US Fed as they take their show on the road and try to convince the public that current policy is helping the economy move forward. The problem is that there are often conflicting speeches, and don’t tell the true story of what has taken place.Lat night, Big Ben kicked it off and said that he is keeping a careful eye on inflation leading some to believe that rate hikes may be coming sooner than the market thinks. The problem with this view is that the metric the Fed relies on to view inflation, core CPI data, is flawed. Too much of that figure relies on housing prices, which got so inflated during the bubble that they are bound to continue to fall for some time. So we could have $150 oil, $5 gasoline, but housing prices fall 10% and there is no inflation! Doesn’t give me too much confidence.
Overnight in Australia, the RBA kept rates unchanged and hinted that no further rate hikes will be forthcoming for the rest of the year, which was no surprise. What was a surprise however was that the trade balance showed a deficit of $200 million vs. an expectation of a surplus of $1 billion. This shows that perhaps Australian exports are too expensive because of the Aussie dollar strength, and that Australians are using their new-found currency wealth to buy expensive imports.
In the UK, the Pound is higher as PMI services figures came in better than expected showing that the UK economy may be recovering from the dip in GDP it had last quarter due to austerity measures.
Markets are set to open slightly lower this morning, with both stocks and commodities pulling back.
In the forex market:
Aussie (AUD): The Aussie is lower across the board as the RBA left rates unchanged but more importantly, exports decreased again showing that the high value of the Aussie may put pressure on GDP growth. In addition, China raised interest rates 25bp in an attempt to slow inflation. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is actually higher across the board, receiving the benefit of money flows from the Aussie.
Loonie (CAD): The Loonie is mostly higher despite lower oil prices to start the morning, pulling back to a $107 handle from the yesterday’s highs of $108. This is still a very high price for oil, so it hasn’t affect the Loonie too greatly this morning, which is also getting a bid from money leaving the Aussie.
Euro (EUR): The Euro is lower across the board as there is minor Dollar strength due to Bernanke’s comments last night. In addition, Portugal was downgraded again, ahead of tomorrow’s GDP report and Thursday’s rate decision. Lower retail sales figures somewhat offset higher PMI data. (Click chart to enlarge)
Pound (GBP): The Pound is higher across the board as PMI services index came in much better than expected showing sign that the UK economy may be gaining traction after last quarter’s disappointment. While the BOE is expected to keep current rate policy steady this Thursday, it could increase the chance of a hike at the following meeting.
Dollar (USD): The Fed policy-makers are out in full force trying to sell their current policy to anyone who will listen. The Dollar is fundamentally weak right now and will continue to be until QE2 ends. The release of the FOMC meeting minutes this afternoon is likely to paint a different picture than what gets said today. When it comes to the Fed, remember to disregard what they say, but watch what they do.
Yen (JPY): The Yen is mostly lower with no news on the horizon other than the report that the operators of the nuclear facilities in question have been dumping radioactive water into the ocean. Not good.
You know policy is bad when you have to get out and sell it. Especially when the minutes are being released on the same day. It’s almost like a pre-emptive media campaign designed to fool the public.
I don’t think anyone is buying it at this point. The attempt today to obfuscate policy and to essentially cover their butts is appalling and it is shameful that there is no honesty about the current situation and how bleak it looks.
In addition, we are facing a government shut-down if Congress can’t agree on budget cuts and it is unfortunate that the politicians who exist by essentially buying votes can’t stand up for fiscal responsibility.
So Dollar weakness will continue to drive world markets higher, yet it will be the average person who feels the pain of inflation. Thanks, Fed.
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