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The current trend of trading between risk on/risk off remains in place as can be evidenced by the recent tight ranges seen in the major currency pairings. This is in spite of August’s turbulence with both major financial and geo-political events hitting a thin market.
We got no blockbusting policy from Jackson Hole on Friday, but the Fed chairman failed to rule out further action if the US economic outlook continues to deteriorate. The markets were probably wanting something more concrete, but Uncle Ben did deliver the one thing guaranteed to lift equity markets – hope. Instead he talked about fiscal policy, probably paving the way for President Obama to announce stimulus measures in a speech on Sept 5th he also sounded reasonably positive on the economic recovery, which may or may not turn out to be ill judged given we have an important non-farm payroll number coming up this Friday. Other US data of note this week include the minutes from the last FOMC meeting on the 9th August and consumer confidence, both due this afternoon. Given the importance of Friday’s speech it is unlikely that we get anything unexpected in the Fed minutes.
It’s all about Jackson Hole and ahead of today meeting the USD index is likely to maintain its place in towards the middle end of its recent 73.47 – 75.12 range helped by weaker equity markets. Expectations or hopes that Fed Chairman Bernanke will announce or at least hint at a fresh round of quantitative easing have receded allowing the USD to escape further pressure. Bernanke will likely keep all options open but there are still some in the FOMC who do not want to embark on QE3. Read the rest of this entry »
Sterling took a hit yesterday against most of its major rivals as investors look towards tomorrows GDP number from the UK. The estimate is for 0.2% growth over the last quarter, but traders are wary that with the recent weak figures from the UK economy, the number could be worse than the expectations. The Pound has been buoyant recently and trading near 5 months highs though if the data does come out lower than the estimate, we could be set for a new downward trend for Sterling.
Although Fed Chairman Ben Bernanke has hinted that further Quantitative Easing is unlikely, saying instead the Fed is committed to keeping interest rates low until at least 2013. The markets are eagerly awaiting his speech on Friday. Mr Bernanke indicated QE2 was on the way from Jackson Hole this time last year, and the markets responded better than even he could have predicted. One of the aims of zero interest rates and QE is to force money into risk assets, and it looks like equity markets are setting up for the expectation of a further round of easing being announced. But they may be bitterly disappointed. The key differences from last time are that the spectre of deflation, one of the key motivators for QE2, is not the threat it was a year ago and there is also dissent from 3 Fed board members further clouding the Feds ability to implement any new round of QE.
European Central Bank head Jean-Claude Trichet reduced bond purchases to €14.3bn from €22bn after its buying provided well needed relief to Italian and Spanish yields. As borrowing costs for Italy and Spain soared to unsustainable highs earlier this month the ECB reactivated its controversial bond-buying programme. This has been successful so far, as Italian and Spanish bonds have fallen back to around 5% from above 6% previously and before ECB intervention. Unfortunately this is not the case throughout the Eurozone, as yesterday saw Cyprus bond prices sore to 7% on €23.1m worth of 10-year bonds, compared to 6.25 per cent at a similar auction in June. Officials in Cyprus reacted by declaring it would consider additional austerity measures with a two-point increase in sales tax, a three per cent contribution from civil servants’ salaries and additional tax for high earners.
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