Daily Currency Insight courtesy of Halo Financial

(Helen Fox) #1

Apologies for the lack of DCI yesterday - a slight technical glitch on my part :)

Today's highlights:

• Bank of England interest rate decision

• European Central Bank interest rate decision

• US Initial jobless claims

• US Q3 Preliminary nonfarm productivity

• US Q3 Preliminary labor costs

Finally the eagerly awaited US Federal Reserve announcement last night revealed to the market the extent of the planned Quantitative Easing (QE). Forecasts had predicted between US$300bn and US$2tr with a figure less than US$500bn likely to result in US dollar strength and a figure above US$1tr likely to result in US dollar weakness. The announcement was actually US$75bn per month for 8-months or US$600bn in total with the right to reserve more QE if needed later. It was pretty much bang-on expectations therefore the reaction so far has been limited to a 1% fall in the greenback.

The US dollar is weaker after this announcement and is likely to come under pressure in the short-term. The US authorities will be happy with further orderly declines in the greenback as this is seen as a necessary requirement to avoid a “double dip” recession.

A much weaker US dollar is likely to trigger a currency war starting with the Bank of Japan who is expected to intervene again in the next few days and a pick-up in jawboning from other central bankers to hit newswires imminently.

The Bank of England Monetary Policy Committee (MPC) will announce at midday today that interest rates are left on hold at 0.50%. They shouldn’t announce an increase in QE above £200bn for obvious reasons. Inflation is well above their target and not falling. Commodity prices are surging and VAT is due to rise to 20% in January. And finally the benefit from the £200bn already injected is very questionably - what good will another round of QE do?

However while we are on the subject of currency wars and the rush by central bankers to devalue their currencies, a sure fire way for Mervyn King et al to keep the pound down is to announce another round of QE. This is a very unlikely outcome but it is not one that can be completely discounted given this particular MPC.

The European Central Bank (ECB) will also announce no change in their interest rate from 1.00% at 12:45pm. They apparently don’t do QE in Europe but when you hover up all the bonds of Portugal, Ireland and Greece because no one else will buy them, then that’s QE in my book.
The ECB press conference at 13:30pm could be interesting if President Jean Claude Trichet is drawn into responding to questions about Euro strength.

The UK Halifax October house price index rose an impressive +1.8% after it recorded a horrific -3.2% fall in September. These housing figures will be more reflective of the true market when the banks start lending again. I can’t help thinking that the housing market would be significantly stronger if only people could get a mortgage. At present very few are putting their houses on the market and very few are managing to get a mortgage therefore the market is going nowhere in a hurry.

New Zealand's broadcasting watchdog has warned against picking on redheads, saying a radio station's "Hug-a-Ginga Day" caused distress among flame-haired children. People complained that terms such as "ginga" and "ranga" were insulting.
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