The three expected events yesterday had their effect but there were some curve balls as well. Mervyn King, the governor of the Bank of England was in good form. Every time he opens his mouth, Sterling weakens and yesterday was another bravura performance. His warnings that the UK economic nowhere near clear of the recession, suggestions that further financial stimulus would be needed before we were out of the woods and his virtual assurance that UK interest rates would stay low for a long time to come were enough to weaken Sterling but it did recover to once again test the tops of its trading ranges before the day was over. Mr King’s warning that further Quantitative Easing may be necessary will come as a worry to many after the Bank of England announced it was currently £5.5 billion in the red on its existing £200 billion of purchases of government and corporate bonds.
The US durable goods orders report disappointed as it reported the second straight month of decline and that was enough to weaken the US Dollar through most of the day. The Pound is up at the very top end of its range against the US Dollar and looking very overbought on all the relative strength indices. Against the Euro, the US Dollar has retreated to a now familiar level of $1.30 which is clearly a tipping point. Traders are not brave enough to push above this level and the indicators are that this is little more than the effect of speculators selling out of traders where they previously bought the US Dollar against the Euro. Later in the day the US Federal Reserve released its Beige Book; the report still speaks of modest growth but says that growth is losing pace in some areas. There are no signs of the feared ‘double dip’ recession but slowing growth is not what traders want to see. The other curve ball was the fact that the governor of California, Arnold Schwarzenegger declared a state of emergency over California’s finances. Isn’t it odd that a state which looks so wealthy from the outside has no money in the bank but then again, this is a story since time immemorial; ‘lace curtains in the windows but no sheets on the bed’ is the expression that springs to mind.
That clearly had an effect on the US Dollar but it also weakened the Canadian Dollar largely due to the fact that Canada sends 75% of its exports directly south to the US. We get 2nd quarter economic growth data from both the US and Canada on Friday so these numbers will be analysed to within an inch of their lives before the weekend. Expect significant volatility between now and then.
The fallout from this uncertainty and the swathe of worse than expected data in the US and elsewhere is that the Swiss Franc, a staple in the safe haven school of investing, is still gaining strength much to the chagrin of the Swiss National Bank which is fighting a losing battle trying to keep its currency weak. We heard recently that they were practically out of cash for this purpose and traders are clearly taking advantage of that admission. However, it must get to the point where there are no more Swiss Francs to be bought or not enough traders with the capacity to keep taking that trade on. Sadly for the SNB, I don’t think we are at that point just yet.
As expected, the Reserve Bank of New Zealand raised its base interest rate last night from 2.75% to 3.0%. This was so widely forecast that the NZ Dollar barely moved on the news but the comments from the head of the RBNZ, Alan Bollard were interesting. He voiced his concern over the recent strength of the NZD and the damage it was doing to the country’s exporters as well as the domestic economy. He said “The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices.” Anyone looking at that would conclude that he is missing the point; probably deliberately. The point is that NZ interest rates are very attractive to overseas investors who can get virtually no yield in America, the EU, UK or Japan but can borrow at very low interest rates in these countries and can invest that money in NZ for an immediate yield gain. And Mr Bollard, you have just improved that gain so the path is still for NZ strength unless something happens externally to change the picture. In the very short term though, the Sterling - NZ Dollar exchange rate has risen a couple of cents so that is good news if you have an immediate requirement to buy NZ Dollars.
Today’s highlights include Eurozone consumer confidence, UK money supply and mortgage data and the US weekly jobless claims numbers. Only the UK money data is likely to move the markets and anything that paints a picture of the state of UK credit levels is central to the Bank of England’s plans to reinvigorate the economy.
Finally, as our Prime Minister is seen to be having a bumpy Asian trip as a carrier of foot in mouth disease, the story in France is even more undiplomatic. President Sarkozy has caused uproar in his direct condemnation of Romanian gypsies. His plans to break up their camps, to “systematically evacuate” them and deport all the illegal immigrants have sent shudders up the spines of those who remember ‘systematic’ targeting of gypsies in France’s past, especially as the debate about Islamic veils is still in the headlines. It may be a false accusation but he does open the doors to racism taunts. At least he isn’t calling Pakistan a terrorist exporter Eh!