If there was no counterbalancing news today, the words of the IMF Deputy Managing Director in Singapore might have dragged both equities and the euro lower. Mr. Naoyuki Shinohara served up a somber assessment of what he called “subdued recovery” in many parts of the world, while noting that risks to the economic outlook had “risen significantly.” His most worrying observation was concern that ongoing policy support has become more limited and in several nations has been exhausted. If it wasn’t for the comfort of a separate story in which Reuters cites a Chinese government official jumping the gun on a 50% surge in export data through May, the world might be facing yet another asset price slide.
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U.S. Dollar – The warning from Mr. Shinohara embodies much of what we already know. Monetary policy has been cut to the bone in many parts of the world and in some places has already been removed. Strengthening Asian and other emerging market economies is creating demand for those currencies and central banks are worried that to start raising now might be striking directly into the rising headwind inspired by waning European demand.
Fiscal policies during boom times had previously been woefully lax in preparation for economic downturns to the extent that all it took was one good crisis to expose the fundamental flaws in budget policies. The subsequent pressure nowadays is on lifting fiscal policy in order to assure lenders that repayments and coupon flows are guaranteed.
Quantitative easing has worked to an extent but potentially adds to deficit spending and in most advanced economies has run its course. Perhaps with all of these known factors, the words of Mr. Shinohara mean less today than they would have three months ago. The dollar index against a basket of its trading partners is losing ground today as risk aversion subsides. It seems that a possible surge in Chinese exports argues that demand is not as weak as investors first feared.
In today’s economic calendar Chairman Bernanke visits Capitol Hill to give his assessment of the economy. Earlier he referred to the rebound as “moderate” and between this address and a later Beige book assessment, investors hope to better understand the prospects for the U.S. economy before the session is over.
Euro – With not a single mention of Hungary in any of the news that I reviewed this morning, the euro has managed to hoist its ugly head back to $1.2000 in early morning trading. The ECB starts its regular monthly meeting and will tomorrow announce unchanged policy with the post-announcement press briefing taking center stage.
British pound – The pound has found a strong bid ahead of U.S. data that may show businesses continued to replenish levels of inventories. Currently the pound has traded at its intraday high by reaching $1.4549 and is now up by over a cent on the session. Earlier the pound remained hindered by yesterday’s Fitch ratings warning over the need to accelerate spending cuts to rein in the budget deficit. And today investors were again served a further worry that the meager pace of expansion might run out of steam after an index of permanent hiring in the U.K. rose at its slowest pace in four months. The pound rose to 82.60 pence versus the euro and added against the yen to ¥133.13.
Aussie dollar – Moribund words from Reserve Bank Governor Glenn Stevens admitted that the tone to global activity would be dulled by the impact of the European debt crisis although noting a lack of convincing evidence at this point in time. He also anticipated a moderation in Asian activity. However, he was clear to note that European budget problems are strikingly different than those in Australia where the budget deficit might actually be reduced looking several years ahead. Earlier in the week a report showed waning business confidence while home lending data also suggested that tighter monetary policy is working. The Aussie dollar pulled off its lows, however, as commodity prices continued to rebound and risk aversion abated. The Aussie currently buys 92.85 U.S. cents and it also rose against the yen to buy ¥75.78.
Canadian dollar – The price of oil is higher today after the slip from a Chinese official that unofficial trade data was firm as exports out of China during May jumped 50% over a year earlier. The better tone to commodity prices serves to bolster the Canadian dollar, which rose to 95.80 U.S. cents and is higher by three-quarters of a penny.
Japanese yen –The weaker tone to risk aversion is allowing the dollar to make gains versus the yen to ¥91.58 while against the euro the yen is weaker at ¥110.00.
Andrew Wilkinson is a Senior Analyst at Interactive Brokers
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