The market is showing some mild risk aversion this morning as Euro zone GDP figures came in unchanged, showing neither growth nor contraction. Signs that the EZ economy is slowing should come as no surprise as the mounting debt problems of its members show that austerity measures are intended to reign in government spending and not to provide additional stimulus. The fact that growth is not negative is actually a positive sign in my eyes, though the market disagrees this morning.
The Pound is also lower this morning as service growth came in lighter than expected, in addition to the news that polls show that a “hung Parliament” may become more likely at next month’s election.
Meanwhile, oil is trading below 86 and gold is around 1135, putting mild pressure on the commodity currencies.
The big news, however, is that there is increased speculation that a G-20 attempt to get China to revalue its Yuan may prove more successful than the bilateral approaches that had been tried before. It’s sort of like an intervention, where the drug addict has to hear it from everybody rather than just a few. I suspect we will begin seeing some Yuan strengthening in the near future.
In the forex market:
Aussie (AUD): The Aussie is marginally lower this morning on risk aversion themes after reaching an 18-month high vs. the Japanese yen. It is widely expected that the RBA is not finished with rate hikes this year as economic recovery is strong due to exports which may result in inflation. Tomorrow they will report employment figures.
Loonie (CAD): The Loonie is slightly lower this morning as oil prices are off a bit, but more and more investors are getting hip to the fact that the Loonie is poised for gains this year as it hovers around parity with USD. While yesterday I swapped the Loonie and Kiwi in the “risk hierarchy”, it doesn’t appear as though the market agrees with me. Yet.
Kiwi (NZD): The Kiwi is lower on risk themes as well, though slightly higher against the Loonie. I still think the Canadian economy is poised to do better this year, but the interest rate differentials may prove to be the difference. The Kiwi is setting up nicely as a buy vs. the Loonie based on technical factors.
Euro (EUR): The Euro is lower this morning and looks like it is going to re-test its lows of the year and beyond, especially if it continues receive “bad” economic news. During the financial crisis, the ECB did not lower rates as much as the US and the UK, so the Euro maintained some semblance of strength once global economic recovery started. Now that the other economies around the world appear to be further along, we could see some additional Euro weakness from a growth perspective, as well as any hidden debt “land mines” that could come about from some of the other PIIGS countries.
Pound (GBP): The Pound is lower this morning as services growth came in less than expected, renewing fears that there may be too much optimism about the UK economy. The BOE is expected to maintain interest rates and its bond-purchase in place as it may be too early to withdraw as economic recovery may be too nascent. With the additional concerns regarding the elections next month, fears are that the UK could see the dreaded “double-dip”.
Dollar (USD): The Dollar is higher against all but the Yen as risk themes are driving the market this morning. A few of the Fed governors including Bernanke are expected to speak today which should be nothing more than a CYA session.
Yen (JPY): The Yen is higher this morning as the BOJ kept interest rates unchanged as expected, and is benefiting from the marginal risk aversion we are seeing in the market. The BOJ did not cave in to ever-increasing pressure from the government to stimulate the economy, despite the fact that economic recovery is taking place alongside of deflation. The Japanese have experienced this type of economy for a long time so the BOJ may be content to allow recovery to happen without increased measures.
Problems still persist in the Euro zone and slowing recovery could send money and investment elsewhere. The debt issues present among the PIIGS countries highlighted by Greece are no secret. There is still fear in the marketplace, though that fear is starting to dissipate as more and more “good” economic news begins to outweigh the “bad”.
Because the forex market is inter-relational, there is always one currency benefitting at the expense of another. For some time now, one of the MAJOR economies of the world (China) has not participated in this market, which some believe was a major cause of the financial crisis.
Now that there is increased pressure to allow the Yuan to “re-value” or perhaps even “fluctuate”, there may be another player in the not so distant future that could provide one more outlet for money flow. Keep a careful eye on how this begins to play out. While nothing will change overnight, the prospect of a floating Yuan could bring world economies back closer to equilibrium.
Or the whole thing could blow up and a trade war ensues with China labeled a “currency manipulator” or whatever PC term they are using today. Either way, this is an important story to follow as it will have an effect on world economies and thus the forex market.
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