After a largely data free Monday, Tuesday’s flurry of positive EU data wasn’t enough to get traders truly fired up. We did get an improvement in German consumer confidence; the World Cup effect was cited for the improvement, but it looks as though the day traders held sway and most exchange rates traded in narrow ranges for most of the day. If there was a winner it was probably the Pound which made gains across the board.
Overnight news that Australian inflation rose at roughly half the expected pace meant traders had a reason to sell the Australian Dollar and buy other currencies. The quarterly Consumer Price Inflation figure of 0.6 percent was sharply lower than the general market forecast of 1.1 percent and was most significant because the Reserve Bank of Australia had already stated their feeling that this inflation number would set the tone for future interest rate adjustments. The RBA meets next Tuesday and most commentators have now dropped their expectations for yet another interest rate hike.
We also heard that New Zealand business confidence dropped sharply from 40.2 to 27.9 this month as the fear of slowdown in China and the US weighed on sentiment. We still believe the Reserve Bank of New Zealand will hike interest rates by 0.25 percent tonight but reduced prospects of further interest rate rises meant investors were happy to take profits on their Australian Dollar and NZ Dollar purchases and buy into the likes of the US Dollar which has been rather weak in recent days and the Japanese Yen which is certainly looking like the safe haven du jour. This is particularly so as US data suggests the US economy may have another dip in growth awaiting it before the year is over.
In fact hedge fund guru Jim Rogers says he thinks the US will have another cyclical recession within 2 years and he is concerned that the world is ill prepared for the event because we have already “shot all our bullets”. And Robert Shiller who co-produces the Case Shiller house price data thinks it may come sooner than that even though they produced a relatively buoyant house price survey yesterday showing a 4.6 percent rise in US home prices.
In separate news, the International Monetary Fund is torn over the matter of whether the Chinese Yuan is undervalued or not. Hey appear to be the only ones who are confused over this matter; as anyone from the US or EU and they will tell you about how skewed the currency is in favour of Chinese exporters but the IMF can’t decide. Moving nearer to home - well slightly - India has raised its interest rates and warned of impending inflationary problems. This is another stark contrast between the eastern and western hemispheres; interest rates are rising in the Asian and Australasian markets but staying very low in the west with the notable exception of Canada which is very much a commodity driven economy and commodities are very much driven by eastern hemisphere demand at the moment.
Traders get far more reason to trade today with a fairly packed data diary. After a speech by the governor of the Bank of England this morning, we get US durable goods data this afternoon and the publication of the Federal Reserve’s Beige Book this evening. They really do need to get a new title for that book because it doesn’t do it justice. It is a view of the US economy as seen by the various Federal Reserve districts and it is an essential part of the agenda at the next Fed interest rate setting meeting. As such, it is anything but ‘beige’ but they seem to like the name. Perhaps American’s do get irony after all. Either way, it is going to be read in its minutiae by anyone looking for clues of this ‘double dip’ that everyone is so fearful of. Expect volatility overnight.
And finally, it was good to hear Hans Blix at the Chilcott enquiry although, like many of you, I can’t hear his name without thinking of ‘Team America - World Police’ and the scene in Kim Jong-il’s lair. Anyway, that aside, the key word for me in his whole testimony was that he told Tony Blair Iraq ‘MAY’ have weapons of mass destruction. That is hardly a clear and present danger is it. Get Blair back in Sir John and actually make him answer some questions this time eh! By the way, you'll probably have to stump up for his travel expenses Sit John. He's not cheap.