Monday, January 24, 2011

Not a Hawk, But A Dove?

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By Mike Conlon | January 24, 2011

At the most recent ECB rate policy meeting, President Trichet took the markets by surprise in issuing what were perceived to be “hawkish” comments with regard to potential inflation and the policy response to it. This weekend in an interview, he backed away from those comments saying that rates were “appropriate”.

In the Euro zone, PMI figures came in mixed with Industrial new orders coming in lightly higher than expected, though neither report is a major market mover. In addition, there is some pressure on Irish bond yields this morning as they attempt to come up with a budget plan.

There’s no data due out for the US trading session, and earlier data from the Euro zone appears to be muted at best. The big news this week will be the FOMC meeting on Wednesday, followed by GDP figures on Friday. Also this week the market will get a multitude of stock earnings reports, so keep an eye on the correlative effects on the forex market.

Overnight in Australia, PPI figures showed an increase of 2.7% which was higher than the previous reading of 2.2% though lower than the expectation of 3.2%. Nevertheless the Aussie is trading higher, ahead of tomorrow’s more significant reading of CPI data.

Lastly, reports out of Japan have brought the potential for further currency intervention back in play as a government report said that excessive Yen strength “cannot be tolerated”.

So this morning’s action is marked by Euro weakness and a bit of Dollar strength.

In the forex market:

Aussie (AUD): The Aussie is higher across the board as PPI figures show price growth and tomorrow’s CPI data will show whether of not traders believe we will see more than 1 rate hike this year, which is the current consensus.

Kiwi (NZD): The Kiwi is also higher this morning as Yen weakness is driving demand for positive interest rate differentials and although the only news on tap for the Kiwi this week is Wednesday night’s RBNZ rate decision, look for it to trade similarly to the Aussie.

Loonie (CAD): The Loonie is mixed this morning ahead of tomorrow’s CPI data report which will show how they are faring with regard to inflation as oil prices are slightly lower to start the morning, trading just below 89.

Euro (EUR): The Euro is lower across the board on the Trichet dovishness and the potential political gridlock in Ireland with regard to instituting a budget. This is a fairly light week of news out of the Euro zone, with some consumer and business confidence figures due out later this week. (Click chart to enlarge)


Pound (GBP): The Pound is mostly lower this morning ahead of tomorrow’s GDP report. While this is an important report, it may be slightly less significant than Wednesday’s BOE rate policy meeting minutes from which we will see if any policy-makers have changed their tune with regard to inflation and the BOE response to it. (Click chart to enlarge)


Dollar (USD): The Dollar is tracking mostly higher this morning as Euro and Yen weakness send money flows to USD. While there is no news out today in the US, keep an eye on Wednesday’s FOMC decision and statement.

Yen (JPY): The Yen is weaker across the board as the government rhetoric surrounding a weaker Yen and possible intervention in the market (again) if need be has encouraged some selling.

As I mentioned last week, inflation should be on the minds of every Central Banker around the world. This week we will get a birds-eye view of whether or not this is becoming a concern or whether or not they are content to allow inflation to rise.

Right now there really is a “us vs. them” mentality out there when it comes to monetary policy. Governments would love to have inflation to help themselves repay their debt burdens in currency that is worth less (not worthless!). But in the meantime, higher prices reduce consumers’ purchasing power and acts as a hidden “tax” as things cost more, particularly food and energy.

How this helps an economy is beyond my comprehension as all I see coming out of it is floundering and stagnation. Not quite a recipe for health!

I’m going to keep an eye out for the statement from the FOMC and the minutes from the BOE to see if there are any courageous policy-makers left willing to take on government fat-cats and banking interests.

So for now my trading is for the short â€"term, until a clearer picture emerges.

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