Yesterday’s release of the minutes from the last Bank of England meeting offered the expected 7 - 1 vote and no change in either interest rates nor fiscal stimulus funding but it did offer at least one interesting news story. The Monetary Policy Committee did discuss the possibility of increasing their quantitative easing program and if it was required but, as is often the way with central banks, they described the potential increase as ‘modest’, just so that we traders don’t get all aerated.
Later in the day, we had the testimony of the head of the US Federal Reserve speaking to the Senate Banking Committee and his comments were much more interesting. Ben Bernanke spoke of the economy continuing to grow at a “modest pace” but spoke of the conditions being “unusually uncertain”. Mild words perhaps but seeing a central banker do anything other than put on a positive face is enough to cause a fair amount of nervousness and certainly enough to see investors running for safety. As perverse as it may seem, given that it is the head of the US central bank that caused the nervousness, that safety comes in the form of US treasury certificates as well as the usual suspects of Swiss Francs and Japanese Yen. All three strengthened overnight and the Swiss National Bank, which last week practically declared it had no more money for intervention, could only sit and watch its currency sap export income before its very eyes. There is a very strong chance we will see parity between the Swissie and the Euro if this investor nervousness continues.
In the EU, we are still in standby mode as we await Friday’s release of the Bank stress tests; I have to admit I wasn’t aware until yesterday that the tests do not include a scenario in which a sovereign state defaults on debt. Of all things, in this climate, that is probably the most worrying scenario and one that most analysts would like to see tested before they were utterly satisfied that the EU banks are fully able to cope/survive in a very tough environment. It begs the question whether the tests are worth waiting for at all. I guess they are because any bank that fails this series of lesser tests would almost certainly fail is Greece, for example, were to default.
There is also the overall mood that the tests could generate; if the general perception is that banks are barely or not quite ready for the worst the market has to throw at them, then risk aversion amongst international investors will automatically strengthen the US Dollar, Japanese Yen and Swiss Franc but it may also strengthen the Pound due mainly to the fact that the UK is outside the Eurozone and has a very substantial international banking sector. However, the results of the tests will not be released until 5pm UK time on Friday so most British traders will not be able to act on the news until Monday. I would envisage a very busy New York trading session and equally volatile trading on the Far Eastern markets on Monday morning. There are opportunities in that which you should discuss with your Halo Financial Consultant.
Ben Bernanke’s comments also had the effect of weakening the currencies that generally benefit from a more positive economic outlook. The Australian Dollar and New Zealand Dollar are prime candidates for this and both are a tad weaker this morning. They are likely to remain weak at least until tomorrow’s release of the EU banks’ stress tests. If these are less than positive, then further weakness in the Aussie and Kiwi Dollars is likely to ensue. Add to this the fact that the Reserve Bank of Australia is going to use the stress tests as a measure to decide whether Australian interest rates should rise further, and the potential for rapid and sizeable exchange rate adjustments is increased.
Today’s data diary is a monster with news from the EU, UK, US, Japan and Swindon. Well I lied about Swindon but their police and local authorities have proved that removing speed cameras doesn’t increase accidents. Obviously the councils that make a lot of money out of speed cameras disagree but I guess that was inevitable. But I digress; the vast array of data from around the globe will keep traders on their toes today but tomorrow’s main event from the UK perspective is the first assessment of economic growth in the 2nd quarter of the year. A marginal increase to 3.0% is forecast but we know it has been a tough trading period and the various strikes have had an effect so it is open season on GDP data.
And finally, I was impressed to see that the police had the nous to call in Ray Mears to help find gunman Raul Moat. If you want to find someone surviving in the wilds of a forest, who better than a world renown survivalist? But rumours that Ray fashioned an improvised taser out of willow sticks, fern fronds, red ant venom and some blackberry thorns were said to be unfounded.