The week started in muted style with only slight variations in the exchange rates on the day. In the absence of major market moving data, traders concentrated on the broader economic themes. Concerns over whether the US economy is set to climb out of recession without a second dip are keeping a cloud of uncertainty hanging over the markets and the failure of the Euro to break above US$ 1.30 has left many wondering whether the Euro has the fortitude to make that move on this rally. Euro traders are also nervous over whether Hungary’s refusal to implement even more austerity measures is a picture of the future of Greece in its relations with the EU an International Monetary Fund, both of whom are calling for further Hungarian spending cuts. This story along with the news that Ireland’s sovereign debt was downgraded yet again, have caused a bit of reassessing overnight and we may see some weakness in the Euro today. However, anything that happenes to the Euro ahead of Friday’s publication of the ‘Stress testing’ of EU banks is likely to be a tad muted.
The effect of all of this on Sterling will be interesting to watch. The Government’s plans to cut costs and debt are partly reliant on growth in exports to the Eurozone which are only going to happen if the Eurozone is itself growing out of recession. If the second wave of contraction does affect the US and Eurozone, last week’s warning of a potential downgrade to Britain’s credit rating from credit agency, Standard and Poor’s won’t be the last piece of bad news for the UK. Traders will be keen to see Wednesday’s release of the Bank of England minutes and Friday’s first estimate of economic growth for the second quarter of the year. Today’s release of public sector debt levels will be part of that overall vigilance on the UK economy.
In the Far East, the debate rages over whether the Bank of Japan will move to intervene in the markets to curb the Yen’s strength. There is a strong feeling that, if the Yen strengthens any more, the BOJ will be forced to throw some money at the problem. They have a well documented track record of doing so in the past but a less convincing track record of long term success although the shock and awe of a central bank selling its own currency in large tranches does have a short term effect.
We saw the release overnight of the minutes from the last Reserve Bank of Australia meeting. The headline news is that the RBA is not sure whether it will move interest rates when it next meets. They will undoubtedly be very interested in next week’s inflation data but they are forecasting the inflation rate to be below 3%. Obviously if inflation is above that level for this and perhaps the next month, we will be looking for further interest rate hikes in the months ahead. The Aussie Dollar strengthened marginally after the minutes were released.
The other big news story is that the Bank of Canada meets today and they are widely expected to hike their base interest rate by 25 basis points. If this proves correct, then it marks a departure from normal practice because the BOC generally only moves interest rates when its neighbour, America does. This makes a lot of sense in many ways as America has such a massive influence on the wellbeing of the Canadian economy but Canada has weathered the global crisis rather better than America did and the Canadian economy is in better shape so the BOC has every reason to be ready to ‘normalise’ interest rates in small increments. That confidence in Canada Inc was demonstrated by Monday’s data which showed that foreign buyers nearly doubled their purchases of Canadian securities in May from April to a record level of C$ 23.16 billion. The Canadian Dollar is likely to strengthen on the interest rate news so those with CAD to buy may want to do so before lunchtime in the UK.
The afternoon’s data diary is light with only the US housing data set to break the calm. And it is likely to be quite calm before the storm of the hugely important data releases due to hit us over the last three days of the week.
In other news, it appears the referees in the world cup got off quite lightly as far as rebukes from the players and crown were concerned. In Paraguay things are slightly more heated; when defender Jose Pedroso was shown the red card he really did see red and attempted to strangle the poor referee, Marcelo Miranda. This did follow the ref repeatedly ordering a reply of a penalty which eventually went against Pedroso’s team. By the way, no referees were killed in the making of this story.