IB FX View
ECB President, Jean Claude Trichet’s description of the region’s economy being ‘broadly balanced’ conjures up the vision of economies balancing on a giant see-saw poised perilously over the edge of a cliff. His vision hardly fits the data recently presented, but meshes well with this morning’s decision to cut the main refinancing rate by just one quarter f a percent. However, the decision to cut a more mechanical deposit rate in half to 0.25% is a welcome one.
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The euro rallied sharply against the dollar to $1.3433 and to ¥133.50 against the Japanese yen. Arguably the euro retains a larger yield cushion than would be the case had the ECB gone the whole hog and cut the refi-rate further. But the real sigh of relief to boost euro bulls’ appetite was the failure to announce any kind of quantitative measures, which while potentially stimulating the economy would taint the single currency as much as any other major unit whose government has cranked up the printing presses as a way to dig us out of a very large hole.
The risk-panorama appears to have completely changed for the better over the course of the past week. Suddenly, the world is awash with stories of upside surprise to data, which in reality do augur a slowing in the pace of contraction. Investors keen to pick the typical five month lead in an equity rally ahead of the end to recession will have to watch their backs carefully this time around.
Unemployment is likely to continue to rise in the face of still harsh credit conditions. The current wave of optimism may turn out to be nothing more than a blip on the radar screen and it has to be said that with many data series putting in generational low points, it’s hard to argue for continued downside acceleration. For now, the worst readings have been seen. But we have to be careful what we wish for on the other side. The road to recovery as we have pointed out before is paved by private rather than public spending. That lead needs to be picked up on before the economy starts to operate normally and within the current environment of rising joblessness, it will be a long time before that can naturally occur.
A rebound is likely to play out slowly and with the highly visible marks scarred across the face of the economy, there is likely to be a cap on economic activity levels through either natural caution or simply an outright cap to available credit going forward. Neither is likely to be a positive for earnings, which will be borne out over time. Hence, investors expecting a resurgence for stocks may end up spending several very frustrated years watching sideways price movement.
We note with interest the nationwide report of rising house prices in the U.K. today. Sure, everyone was expecting yet another decline. The pound rallied against the dollar to $1.4705 while one euro now buys 91.25 British pennies. This is the first time since October 2007 that monthly prices have gained, but again, we’d forewarn that you should be careful what you wish for. Rising house prices are about as welcome as rising crude oil prices and what will be most interesting once this crisis of capitalism is clearly over, is where economists and politicians want to get back to.
The commodity dollars are on the rise in the face of increased risk appetite. With crude oil higher this morning at $51.80 commodity dealers are merrily forecasting a baked-in recovery also. The Aussie jumped to buy 71.51 U.S. cents and is nearing resistance one penny above here, while the Canadian dollar is back above 80 cents today. With Chinese urban investment rallying throughout the first two months of the year adding to warm hopes for global recovery, the rumor of additional fiscal stimulus in next month’s Australian budget leaves the currency bid today.
Finally, the Swiss National Bank is still making waves, at least verbally over its desire to see an end to Swiss franc strength. Vice President, Philipp Hildebrand echoed the sentiment of Jean-Pierre Roth today when he threatened further intervention to counter the potential deflationary impacts of franc strength that his created a stricture around domestic export activity. The jawboning has lifted the euro to Sfr1.5225 today from Sfr1.5172 yesterday but the dollar refuses to tow the line and is weaker against the franc at $1.1326.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
