Daily Currency Insight 07/12/2010

(Helen Fox) #1

Being a central banker at the moment must be like being a stand up comic in a room full of hecklers. Every nuance of every word you utter is picked up by someone somewhere and analysed and criticised until the original meaning is entirely forgotten. The European Central Bank is under pressure from within the Eurozone to support the ailing economies of the less successful countries, under pressure from the International Monetary Fund to increase the amount of money it makes available for such activities, under pressure from German taxpayers to stop spending their hard earned money to wasteful economies elsewhere and under pressure from every journalist who can spell Euro to do something or other. I feel kind of sorry for them because their lot is not an easy one. And then I read about how much money is being spent on EU staff and their expenses and I think, scrap the whole thing.

That isn’t going to happen though; too many vested interests and very little accountability but there I go adding my criticism to the melee. However, the level of criticism of the Eurozone financial management is coming thick and fast and fears of further deterioration in the state of some of the peripheral Eurozone nations is keeping the Euro on the back foot.

Other central Banks are also in the firing line but they perhaps have more control and a simpler task because they are in charge of just one economy with one set of tax and spending rules. The Reserve Bank of Australia decided early this morning, UK time, to leave its base interest rate on hold at 4.75%. The RBA seems happy that the current interest rate is appropriate and is keeping a watching brief for the time being. The Australian Dollar weakened a tad after the announcement which was exactly in line with forecasts.

All eyes switch to Canada this afternoon where the Bank of Canada makes its interest rate announcement. Once again, no change is forecast in Canada’s 1% base rate and there appears little prospect of any change for some time to come. Higher commodity prices are supporting the Canadian Dollar and noises coming from America suggesting the US Federal Reserve will take more urgent action to boost jobs is seen as a positive for Canadian exports.

The Euro weakness and general concern that the global recovery is losing pace have combined to make the US Dollar a more attractive option. It strengthened overnight within current ranges but further strength could well follow. It was not helped by the comments made by the Chairman of the Federal Reserve who suggested the Fed could expand its quantitative easing program beyond the $600 billion already added. That extra injection pushed the total QE program to $2.3 trillion so who knows where the end of this program actually lies. Ben Bernanke’s rather cautious comments contrasted with those of Chairman Lacker from the Richmond Federal Reserve who is expecting both inflation and growth to pick up. Let’s hope he is right but this disparity is seen in other members of the Federal Reserve’s Open Market Committee and is perhaps one of the reasons the US Dollar is so very volatile right now.

The air of nervousness is palpable and that can be seen in the record highs in the value of precious metals. Gold hit an all time record high yesterday while silver hit its highest level in 30 years.

There is a distinct lack of data for traders to mull over today. That is likely to lead to fairly lacklustre activity but central bank comment is the current driving factor so anything said by any ECB, BOE or Fed member will have an effect. Beware the unguarded comment.

Meanwhile, England has taken a 1-0 lead in the Ashes series after an impressive win, handing Australia their worst home defeat in decades. The Aussie press have turned on their team and the criticism is unbridled. Judging by the vehemence in their articles, I would bet many of the Aussie journalists were trained in Britain; weaned on savage attacks on British sportsmen.

Written by David Johnson, Director, Halo Financial