Thursday, June 9, 2011

Decisions, Decisions!

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By Mike Conlon | June 9, 2011

Earlier this morning, the BOE came out with the UK rate policy decision and there was no change to policy, as was expected. Because there is no policy statement with the release, we will have to wait until the release of the meeting minutes to determine if there is any change of sentiment among policy-makers.

The ECB rate decision is due out shortly, and the accompanying statement will potentially move markets. Bets are increasing that the ECB may raise rates at next month’s announcement, despite all of the problems related to Greece and the debt crisis.

This really shows the dichotomy between two Central Banks, the ECB and the US Fed. The ECB is moving forward with policy that may force politicians to figure out a resolution to the problems that ail them, while the US Fed enables politicians to do nothing. It is clear that the ECB is out in front of the global economic crisis, with the Fed lagging behind.Last night, the RBNZ left rates unchanged in New Zealand, but issued hawkish statements which has given a boost to the Kiwi. In Australia, employment figures came in worse than expected, causing the Aussie to decline.

Japan reported worse than expected GDP figures overnight, though it was extremely hard to gauge what the impact of the natural disasters was, though the market knew it would be negative. The fact that it didn’t come in way worse than expected is positive, and perhaps BOJ monetary easing is in the cards when it looks like they may be closer to getting on track.

So we are seeing some risk appetite this morning, with stocks and oil higher, though gold is slightly lower as it has been more of a safe haven of late than a speculative instrument.

In the forex market:

Aussie (AUD): The Aussie is mostly lower after employment figures came in worse than expected. 7800 jobs were added vs. an expectation of 25K. The unemployment rate remained steady at 4.9%, though the economy may be cooling on its own as the global economy slows.

Kiwi (NZD): The Kiwi is higher across the board after the RBNZ left rates unchanged at 2.5%, but issued hawkish statements that leave the market to believe that the RBNZ may be the next from the commodity bloc to raise interest rates to control costs. (Click chart to enlarge)


Loonie (CAD): The Loonie is also mixed this morning ahead of tomorrow’s release of the Canadian employment report. With mild risk-taking and higher oil prices, economic prospects in Canada are improving.

Euro (EUR): The ECB rate decision came in this morning leaving rates unchanged at 1.25%, but there is a bit of an expectation that Trichet will signal a rate hike at the next meeting, despite the European debt crisis. German CPI data due out tomorrow may confirm this sentiment. (Click chart to enlarge)


Pound (GBP): The Pound is mostly higher as well, likely the result of risk appetite as the BOE left policy unchanged and trade deficit figures came in better than expected. Tomorrow will bring manufacturing and industrial production figures.

Swissie (CHF): The Swissie is weaker across the board as there is a lack of demand for the safe haven of the franc.

Dollar (USD): The Dollar is mostly weaker on risk appetite even though initial jobless claims came in slightly higher than expected at 427K, with last month’s figure also revised higher. The trade deficit however came in less than expected which may be a silver lining.

Yen (JPY): The Yen is mostly weaker after last night’s GDP report showed a decline of 3.5% vs. the expectation of a 3% decline. While this number was extremely hard to predict due to the nature of the factors involved, BOJ monetary easing could be forthcoming to help jump-start the economy.

There is very volatile market action as Trichet was issuing his statement that coincided with the release of the initial jobless claims here in the US. But there is a stark contrast between what the ECB is doing and what the US Fed is doing to help improve economic conditions.

The ECB is essentially saying that higher rates may be forthcoming so politicians better find a solution to the debt crisis PDQ or it could get out of control. This is a proactive stance intended to force good behavior and fiscal responsibility.

The fed on the other hand, is reactionary and seeks to clean up the mess left by politicians who are not doing their job. QE2 was a direct response to the government being unable to reign in fiscal policy. Rather than stand firm to promote change, the Fed goes to extraordinary measure to enable non-action and bad behavior!

There is moral hazard on so many levels in the US and it starts with government. We used to be a principled society that lead by example, and now we are a culture of reactionaries who respond to popular opinions. How we get out of this mess is anyone’s guess but we are heading toward the abyss and the politicians are asleep at the wheel!

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