All was as expected yesterday; the Bank of England left its base interest rate on hold and gave no press conference, the European Central Bank left its base rate alone and gave little hint of any imminent change in its press conference and the markets carried on as before, selling the Pound and US Dollar and buying the Euro, Yen, Aussie Dollar and Kiwi Dollar.
Traders and investors were hoping for some guidance from either or both central banks but got nothing and, after the fall in office payrolls as reported in the ADP survey, traders were busy preparing themselves for today’s release of the September employment report from America. This report is always high profile as this will be the first of the September data for traders to get their teeth into and for analysts to use for their forecasts. This month’s report is even more significant; coming as it does, at a time when the US Federal Reserve is contemplating ‘QE2’ as it is known; the second round of quantitative easing and an expansion of US money supply.
Most forecasters have shifted their position over the last few days and the general view is that we will see a slight fall in non-agricultural jobs but that leaves the door open to a positive result causing confusion and a rapid reassertion of US Dollar strength. The Dollar has reached oversold levels against the Euro, Japanese Yen and Australian Dollar in the last 48 hours so there is plenty of room for profit taking amongst investors and traders. Don’t be surprised if that happens prior to the data release at 13.30 UK time.
The Euro’s gains are an inevitable consequence of the fact that the ECB is one of the few G& central banks which is talking about reducing its financial stimulus to the financial markets when all around are signalling further expansion. And yet the head of the ECB is concerned that the consequential Euro strength is likely to make EU exports harder to sell overseas. Financial stability and currency strength are obvious bedfellows in these markets so they really shouldn’t be surprised by the effect. Whether they will soften their stance on cutting fiscal stimulus in order to weaken the Euro is a moot point. However, there is no doubt that this will be a major talking point behind closed doors at this weekend’s meetings of the G7 and the International Monetary Fund. The US, in this equation, is in an odd position because they are complaining of China’s Yuan being vastly undervalued due to government policy while the US Dollar is itself declining due to the Fed’s stated intention to add further money market liquidity. You say Tomayto and I say Tomarto. You say currency manipulation and I say ‘inevitable consequence of unavoidable economic rebalancing’. Hopefully they won’t call the whole thing off but there is tension between the EU, US and China.
Sterling had a good day in some ways yesterday. The best manufacturing growth since 1994 was enough to put a smile on some traders’ faces and the Pound gained after the number was released but that was undone by the lethargy which followed the two interest rate announcements. I am not sure what the catalyst will be which re-establishes confidence in the Pound but unless something unexpected springs out of the woodwork, we may have to wait until the Comprehensive Spending Review is published in a fortnight or so.
While we are waiting, we can bide our time watching the machinations at Liverpool Football Club or the formation of Ed Milliband’s shadow cabinet but for the pupils at the Meridian Primary School in Greenwich, things were much more exciting. A letter from nine-year-old Beatrice Delap to Johnny Depp, asking for Captain Jack Sparrow to come and help her friends mutiny against the teachers resulted in Johnny turning up at the school unannounced in full Capt Sparrow regalia and spending 15 minutes singing and dancing with the pupils. He was filming the latest of the Pirates of the Caribbean series at the nearby Royal Naval College when he received the letter. I would bet that was the coolest day anyone at the school had ever had and I would bet the pupils liked it as well.
cat (Catharine Higginson) #1