The Governor of the Bank of England took yesterday’s release of the bank’s quarterly inflation report as an opportunity to warn that UK inflation will rise and stay elevated for a considerable time to come. That and a narrowing of Britain’s trade gap with the rest of the world prompted a recovery in the Pound. Sterling had looked a bit like an abandoned puppy over the last week as it appeared to slink to lower levels and cower in the corner. The recovery boosted sterling to the very top of its channel against the Euro and got it back to more respectable levels against most other currencies.
This was happening on the eve of the start of the G20 meeting at which some newspapers would have us believe there will be a ‘currency war’ and others believe not a lot will happen. I tend to be in the latter camp but there is a lot of rhetoric flying about ahead of the meeting of the 20 wealthiest nations on the planet.
And the rhetoric is not just international in nature. Within the US, the Treasury Secretary, Tim Geithner, says the US will never weaken is currency to deliberately gain commercial advantage but former Chairman of the Federal Reserve, Alan Greenspan, says that both the US and China are doing precisely that; keeping their currencies weak in order to boost their exporting companies’ chances of increasing business. His views were being expressed on the day that China announced a rise to 4.4% in consumer price inflation, a rise of 13.6% in industrial production and a rise of 18.6% in retail sales. That, somewhat understandably, strengthened the Yuan but I am sure the minor adjustments will not trouble the Chinese authorities too much; most analysts would estimate the Yuan is undervalued by some 20%. However, the move did prompt a rash of articles about whether China is allowing the Yuan to appreciate a little faster and that developed into a small amount of US Dollar weakness.
The improvement in the Chinese data weakened the US Dollar because it caused a flow of funds from safe havens like the US Dollar into higher yielding currencies like the Australian and New Zealand Dollars. The Australasian currencies also strengthened due to the reliance these countries have on China as an export market. Sterling’s slightly improved position staunched some of the expected weakness in the Pound against the Aussie and Kiwi Dollars but the gains were limited.
The Australian Dollar also gained in spite of a sharp rise in the unemployment rate which was at odds with other recent data and caught traders a bit flat footed. Whether we will see some reaction to this in the days ahead is unclear but the demands of a growing Chinese economy probably take precedence in the overall scheme of currency traders’ thinking.
The Canadian Dollar was also in the news for all the wrong reasons, a 3,6% drop in exports to the US was at the heart of a record trade deficit figure but the Canadian Dollar actually strengthened once traders decided that currency movements were behind a large part of the variation.
Today’s data is light and trading will be reduced as the French, Americans and Canadians take a public holiday to mark the end of the 1st Word War. However, there are speeches aplenty from central bankers in the EU and elsewhere. The European Central Bank releases its inflation report so that will be interesting to read and it will be commented on by a number of central bank faces across Europe. Tonight brings a smattering of New Zealand housing market data which may be influential on the NZ Dollar.
Halo Financial will be observing the two minute silence at 11.00 am marking the moment the guns fell silent at the end of the First World War, so we apologise if the phones are not answered at that time but we are sure you will understand.
And finally, some news stories just leap out at you and stop you in your tracks due to the bizarre combination of elements. Dick Van-Dyke was apparently saved by porpoises after he fell asleep on his surf board and drifted out to sea. Stories don’t get odder but I can’t help feeling that, if the porpoises had heard how bad his cockney accent was in Mary Poppins, they would have just let him drift.