The debate rages over the future path of the US Dollar. Those who feel the US economy is bound to slow down, prompting US Dollar weakness are balanced by those who feel the Federal Reserve’s stated intent to increase or extend its quantitative easing programs will cause concern amongst international investors - thereby prompting US Dollar strength as the demand for US Treasury Certificates increases. Only the fullness of time will answer the debate and the current position is that the US Dollar is trapped between $1.56 and £1.61 against the Pound and between $1.35 and $ 1.41 against the Euro. Using these ranges makes perfect sense for buyers and sellers; ‘the trend is your friend’ as the saying goes.
That could all change tomorrow or perhaps next week because Friday brings the US economic growth data for Quarter 3 and next week brings the next meeting of the Federal Reserve at which they may just announce a change in the QE program. Ahead of that, traders will be nervous but perhaps prepared to be a tad more optimistic for the US economy after decent retail sales data and better than forecast data on housing and production.
For its part, the Euro is also treading water; the lack of comment from the European Central Bank is leaving the markets to make their own minds up on the likely path of Europe’s shared currency. What is certain is that the disparity between the pace and state of the individual economies in the ECB’s care is causing more concern tan it has done since the Euro stared its short but eventful life back in 1999. There is just as much pressure on the ECB to hike interest rates to stave off excess in Germany as there is pressure to increase the money supply to keep the Mediterranean economies on the right path. The most likely scenario is an extended period of status quo (no that doesn’t mean a lengthy three chord rock track) where interest rates remain at the current 1% and the ECB tries to avert further expansion of the money supply beyond their current commitment to banks across the region.
Sterling is having a bit of a purple patch. The better than forecast economic growth data, S&P’s upgrade in the UK sovereign debt rating and the lack of any comment from Mervyn King have all helped the Pound. The Bank of England Governor’s speeches and utterances have become synonymous with Sterling weakness of late, so any time he chooses to keep schtum is good news for Sterling. However, we cannot expect the Pound to continue to rally just on those few positive stories; we need further positive data because everyone is understandably nervous that the government’s spending cuts are going to sweep the rug from under the pound. Expect any gains to be rather tentative.
Elsewhere, the NZ Dollar and Australian Dollar have both gained ground on the back of positive data from some of their Asian export markets. The Kiwi Dollar also got a lift from comments from the head of the Reserve Bank of New Zealand, Alan Bollard who stated that NZ interest rates are likely to rise in the near future. This came as the RBNZ kept its base rate on hold at 3.0% and it’s an odd comment because it is certain to strengthen the NZ Dollar which is already sought by international investors looking for higher interest rate yields. This at a time when, despite the waffle they put out from the G20 meeting, most countries are desperately trying to weaken their home currencies as they seek an export advantage for their exporting companies.
The Aussie Dollar made gains on the back of positive Chinese economic data. The Chinese Academy of Social Sciences announced that China’s economic growth will be more than 10 percent this year. China is Australia’s number one export market, so the Aussie Dollar strength is logical.
Today’s big news will be the Eurozone industrial confidence index plus a whole heap of members of the European central Bank who are speaking at various meetings around Europe. However, the markets are really only interested in tomorrow’s US GDP data.
In the meantime, researchers in California have discovered what we all knew all along; that the brain can filter in or out images that it wants to see. Volunteers were tested and shown to be able to screen out images they were not interested in and focus on the ones they were. Any woman who has tried to speak to her husband while he is watching television will know that screening out extraneous noises is a deft trait and any man who has tried to have a conversation with his wife or girlfriend while she is standing outside a shoe shop window will also know this to be true.