Wednesday, April 13, 2011

Just Ignore It!

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By Mike Conlon | April 12, 2011

That was the plan of the BOE with regard to inflation in the UK, and this morning it looks like that plan may be working. CPI data came in this morning showing a gain of 4% vs. an expectation of 4.4%, which means that in fact the lack of government spending due to the austerity measures may be providing relief from higher prices.

However, it must be noted that 4% is still pretty high, and nearly twice the BOE target rate. Some other data from the UK shoed that retails sales figures have slipped slightly and the trade deficit came in slightly lower than expected.

A situation that cannot be ignored however is the nuclear one in Japan, and officials are out saying that the extent of the damage may be worse than originally thought. In addition, the nuclear disaster level has been raised to that of the Chernobyl disaster many years ago.

Another policy-maker not content to put his head in the sand is RBNZ Governor Bollard, who came out and said that inflation may be rising to the point where a change in monetary policy would be necessary. This means potential higher rates.

Canada is going to announce its rate decision later this morning and is expected to leave rates unchanged at 1%. Pay attention to the accompanying policy statement, as it may reveal more about the decision.

Yesterday’s markets were marked by a sell-off in commodities, particularly oil which traded lower by a close to $5. Oil is slightly higher this morning to $109, after trading down from $113 yesterday. Metals were somewhat weaker, though not to the extent of oil. Stocks finished lower and this morning looks like a continuation of selling to start the day.

In the forex market:

Aussie (AUD): The Aussie is mostly lower as risk aversion is present to start the day after the Japanese heightened nuclear disaster levels.

Kiwi (NZD): The Kiwi is higher despite the risk in the market as RBNZ Governor Bollard came out and said that inflation may become a problem and that the Central bank may need to act to curb it. Rates were lowered at the last meeting in response to the earthquake that devastated NZ’s second-largest city.

Loonie (CAD): The Loonie is lower across the board ahead of this morning’s rate decision which is expected to leave rates unchanged at 1%. Higher oil prices have been driving the Loonie to 2-year highs so there may be some dovish comments to accompany the decision to try to jawbone the currency lower. (Click chart to enlarge)


Euro (EUR): The Euro is a mixed bag this morning, balancing between individual fundamentals and anti-Dollar sentiment. German CPI data came in slightly higher than expected, but economic sentiment figures came in worse than expected, posting a reading of 7.6 vs. an expectation of 11.3. The current situation figures were better than expected though, essentially canceling each other out.

Pound (GBP): The Pound is lower across the board as CPI data came in lower than expected, perhaps providing relief to the BOE who chose to ignore the inflation and let it go away on its own. Well not really, government austerity measures and a lack of spending had something to do with it, but whether this is a start of a new trend lower or just an aberration remains to be seen. (Click chart to enlarge)


Dollar (USD): The Dollar is mixed to start the day, as there is relatively little news that would swing it one way or another. Expect it to trade on correlations today with oil and stocks.

Yen (JPY): The Yen is mostly higher as the threats of radiation from the nuclear disaster have been raised. In addition, the government admitted that the costs to the economy may be more than previously thought. Not sure what they were thinking originally.

So it looks like the BOE is getting bailed out today with the affirmation of the lack of policy response, but remember, one reading does not a trend make. Inflation is still high at 4% and unless it continues to trend lower, the BOE is not off the hook yet.

Last week’s run-up in oil and commodity prices was tested yesterday as reports are starting to come out that the commodity story may be over, which tells me that indeed it can persist and make new highs. Call me a skeptic, but when people start beginning to call tops usually tells me that we’re not there yet.

So the major theme in the global marketplace is the week Dollar, and until the Fed acts to change that I don’t see any reason to own the Dollar at this point. However, I will be quick to run through that door should a policy shift or another global risk event occur.

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