Monday was an odd one for data with the slightly contradictory US data keeping traders on the back foot. The release of the first drop in US industrial production since the US recession officially ended surprised the markets and caused a flurry of US Dollar buying as investors unwound some of their riskier investments to buy back the reassuring US Dollar. However, the housing price index from the US National Association of House Builders was the best since June. What is a trader to do when data is so contrasting? Sit on your hands is probably the answer, which is pretty well what most did for the latter part of the day. However, when US Treasury Secretary, Timothy Geithner warned the world that countries cannot devalue their currency as a route to recovery, the US Dollar did gain a little more strength.
The Australian Dollar was also on the move after the release of the minutes from the last Reserve Bank of Australia meeting. You may remember that the markets had expected an interest rate hike of 25 basis points but were disappointed when the RBA left interest rates on hold. The minutes suggest another hike may be on the cards in November and the debate over whether to hike rates at the October 5th meeting was a finely balanced argument. The Australian Dollar strengthened initially but balanced out before the European open.
The lack of data elsewhere meant analysts were reduced to speculating on what might happen in today’s data releases. That data starts with current account and construction output figures from the Eurozone along with the influential German ZEW economic expectations index; a measure of business confidence. No doubt the strength of the Euro will have dampened exporter confidence and that may cause the Euro to correct a tad.
We continue with an interest rate decision from the Bank of Canada which is almost certain to produce no change but traders and commentators are expecting a slight change of tone from the BOC and there is strong speculation that they may have to hike interest rates again at their next meeting although developments south of the border in America will have an effect on that outcome.
The main themes in the market haven’t really altered; UK spending cuts and potential US monetary expansion are the highlights. We get a pre-emptor to tomorrow’s full spending review today when the defence budget changes are announced. We appear to be heading for 8 years without an aircraft carrier followed by many years with two hi tech ones but no one knows if we can afford the aircraft for them to carry. It appears that it would have cost more to cancel the contracts for these two new carriers than it will cost to build them. I don’t know who in government negotiates these things but they do need sacking. Hands up anyone in business who would agree to such a clause. No one....just as I thought; but I digress. The fact is that the negative reaction to a dramatic drop in UK government expenditure is priced into the value of the beleaguered Pound right now so as long as the cuts are no more dramatic than the press is reporting/speculating, then Sterling may well rally after Wednesday’s announcements.
On the US side of things, we are pretty certain that the Federal Reserve will start expanding their quantitative easing program when they meet on 2nd and 3rd November and the US Dollar is priced accordingly. Nevertheless, every nuance in every comment from any of the Federal Reserve high flyers causes some movement in the US Dollar so further volatility is unavoidable in the run up to that meeting. This afternoon brings no less than three speakers from the Fed to the fore. Be ready for the movement and if you are a US Dollar buyer or seller, use this as an opportunity to place market orders at level to suit your needs.
And finally, for all the women who have suffered after a night in a club wearing beautiful but excruciatingly uncomfortable high heels and had to walk home barefoot, there may be a solution. German student, Isabella Fendt, has just launched vending machines which are placed in nightclubs and dispense disposable ballerina style shoes so that sore footed disco divas can walk home in comfort and carry their killer heels. Genius.