BOE bearish but no rate cuts right now. Sterling strengthens
NZ employment data weakens Kiwi Dollar
Rise in Australian employment boosts AUD
Chinese inflation falls in line with forecasts
FX Market Overview
“The outlook for U.K. growth remains unusually uncertain.” Those are the words of the Bank of England who delivered their Quarterly Inflation Report yesterday. They cut their growth forecast for the UK to 0% for this year but they do foresee a return to growth in 2013 and they were quite dovish on inflation. That doesn’t mean we will get an automatic interest rate cut but it does mean we are likely to see more Quantitative Easing and perhaps a small interest rate cut in November when the latest £50 billion increase in their asset purchase plan reaches its conclusion. The BOE is setting great faith in its ‘Funding for Lending’ initiative, through which they expected to lend about £80bn to banks who prove they are moving that money on to businesses and individuals but whilst that may coax banks into lending, most analysts believe it is unlikely the initiative will bring down the cost of borrowing. The real scandal of the LIVBOR market is how the LIBOR rate has remained so very high when the BOE’s cash rate to banks is just 0.5%. That makes mortgages and loans more expensive and saps the economy’s strength. But I digress. Sterling strengthened on the back of the BOE’s report because it didn’t deliver the interest rate cut signal that some had feared and as long as today’s trade deficit figure isn’t too dire, the Pound may well maintain some of that strength.
The Euro had a reasonable day; the markets are still inclined to believe Marion Draghi’s reassurance that the ECB would do whatever it takes to save the Euro. I am a little more sceptical until we see some activity to support that statement. German industrial production was down 0.9% in June. That was largely in line with expectation but a poor reading nonetheless and the markets are looking ahead to further news on whether the Troika (EU, ECB and IMF) will approve further funds for Greece and a mixed bag of data from Germany, France and Italy tomorrow. A number of Credit ratings agencies were in the news as they downgraded Spain but re-affirmed Germany’s AAA rating.
The US Dollar is treading water in the absence of any market moving US data. That changes this afternoon with the release of the US trade balance figure although that doesn’t have the impact it once did. America runs a trade deficit of between $45 and $50 billion each month, it is only when those parameters are exceeded that we see any significant impact on exchange rates. We do get the weekly jobless data this afternoon as well though and, with the labour market still worrying the Federal Reserve, that data is very important.
Overnight news brought a very surprising rise in New Zealand’s unemployment level to 6.8%. The markets were forecasting a fall to 6.5% so this rise, which was the first in over 18 months, was a bit of a shock to the system and the New Zealand Dollar weakened on the news. The next big news for New Zealand is Monday’s food price data and retail sales numbers so the Kiwi Dollar remains vulnerable to volatility over the weekend. These are perfect opportunities for those who need to buy the NZD and automated orders over the weekend are your best ally.
The Australian Dollar, by way of contrast, is a little stronger after employment growth of 14,000 although that was tempered by news that China’s annualised consumer price inflation slowed to 1.8% in July. That is the slowest pace of growth since January 2010 but slightly higher than the consensus forecast amongst analysts. Overnight tonight we get import and export data for China and that has ad direct impact on perceptions of Australia’s export prospects so we are likely to see volatility in the Australian Dollar as we head into Friday.
And in Salt Lake City, a woman is claiming she was under huge amounts of medication and ‘not in her right mind’ when she drove her 4X4 through the front of an office building in an effort to run her estranged husband over. She apparently hit him twice with the Ford Explorer after crashing through the glass in the front of the building and chasing him along a corridor whilst still in her car. Her husband escaped major injury when he hid in a cupboard. Brenda White faces charges of attempted murder and criminal mischief but her lawyer claims she did not intend to kill her ex-husband. Whether that is true or not, I am sure there is a role for her in stunt driving or driver training somewhere.