Thursday was a day dominated by central bankers. The Bank of England did exactly as forecast; the base rate remains at 0.5% and the level of quantitative easing remains at £200 billion and, as is also usual, there was no hoo-ha or press conference to explain either decision. Sterling did hang around like a kid in baggy clothes outside a fried chicken shop for most of the day but a slight rise in Sterling’s value before the UK close was welcome in most quarters. The BOE is expected to be rather less demanding of interest rate hikes now that uber-hawk Andrew Sentence has left the Monetary Policy Committee so Sterling strength is less of a certainty.
The Pound was helped by the interest rate decision from the European central bank which also left its base interest rate on hold and made no change to its cash injection programs. However, Jean-Claude Trichet, the head of the ECB did reintroduce the word ‘vigilance’ into his description of the ECB’s attitude to inflation and further interest rate rises. Pathetic isn’t it that one word in a statement changes the market perception and that we all have to look for the coded messages in Mr Trichet’s comments but we do. He may as well use proper code if he is going to be all secret squirrel about things. “The blue monkey flies east when the moon cries” would work as a coded message for interest rate hikes and “my food processor is powered by lumberjacks” could be used when he is preparing us for an interest rate cut. It would be so much simpler. Or he could just say, ‘there’s a chance interest rates will rise in July’ which is what the markets read into his comments and the Euro slipped back a little. That may appear an odd reaction to the prospects of higher interest rates but the markets had already price into the value of the Euro, the expectation of the phrase ‘strong vigilance’. I could tell you all the other code words but then I would have to kill you and eat the evidence.
The US Dollar was left to wander while the world watched the European central banks. The weekly jobless claims data indicated a continuation in the slowdown of growth and that is a worrying factor for the global economy. If us consumers aren’t in jobs then they spend less time in the malls; that drops consumption and the lack of demand for imports slows the producing economies around the globe’ especially in Asia and Germany. A weaker US Dollar would seem inevitable if that trend continues but it could have repercussions in Australasia which feeds China and Japan.
However, if you look at the strength of the New Zealand and Australian Dollars this morning, you would never think they were even involved. The demand for high yielding currencies is still pretty blatant and, with NZ offering a base rate of 2.5% and Australia offering 4.25%, there is every reason to see further interest in those interest rates in the months ahead. Sadly that is no comfort for those trying to import from or move to either of those countries but forewarned is forearmed as they say.
Today’s data diary offers all manner of opportunities for volatility. The UK industrial and manufacturing data looks set to be rather mixed but with Sterling so weak, these are great exporting times as long as there is a market somewhere that is buying. A positive result from these figures would give Sterling a real fillip so be ready for a bit of a bounce if that is the way the data points. Obviously the opposite is also true; poor data will see a continuation lower in the pound.
Other than this data, the diary is pretty well empty today. There are a number of speeches being delivered by members of the European Central Bank. After yesterday’s comments from Mr Trichet that ECB money would not be used in any Greek bailout, there will undoubtedly be further questions on who is likely to stump up the money for Greece but there may not be too many answers.
Commodity prices are also having a significant influence on exchange rates; especially those of the countries which produce and consume the largest quantities. It adds weight to the argument that the US, a massive consumer, should see its currency weaken and Canada, for example, a major supplier to the US, should see the Canadian Dollar strengthen. Both reactions are true at the time of writing so maybe this is the best indicator to follow for guidance on the South African Rand and the Aussie and Kiwi Dollars; all from countries which export substantial quantities of raw materials.
Today marks the 90th birthday of Prince Philip, the Duke of Edinburgh. His straight talking style has got him into trouble in the past, but I admire his honesty. The Duke said he will now reduce his workload before his “sell-by date”. He couldn’t resist a bit of controversy by explaining his passion for conservation but clarifying that “I think that there’s a big difference between being concerned for the conservation of nature and being a bunny hugger”.
