The message from the annual central bank symposium was pretty straight forward. Central bankers continue to look for new and innovative ways of relaxing monetary policy without relying on interest rates. After all few bankers have room to pare rates and the plight of Japan indicates a degree of insensitivity to almost free money anyway. Mr. Bernanke’s chief theme was that his colleagues remain committed to finding further measures to aid the economy while at the same time recognizing the Fed as being merely a single cog in a larger mechanism.
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U.S. Dollar – The dollar is largely stronger across the board to start the week as the summer draws to a close. Notable is the strength once again of the Japanese yen, which is helping weight the dollar index to an unchanged reading at 82.90 despite its strengthening against most other currencies. Mr. Bernanke noted to central bankers on Friday that the Fed is part of a larger mechanism requiring “effective response from policy makers across a wide spectrum,” including the private-sector. The message is that while the Fed stands ready to act in pre-emptive fashion, it can’t carry the weight of the world on its own shoulders.
Japanese yen – Mr. Shirakawa at the Bank of Japan was swift to conclude his dealings in Wyoming and flew back to Tokyo early in order to coordinate a special BOJ session. The result was an expansion of the special loan program to add a further ¥10 trillion to the economy at continued bargain rates. The announcement appears to have disappointed dealers looking for either a larger amount or a deeper initiative. Some have suggested that the announcement would have carried more weight had it included the purchase of government bonds. The result is a red-rag to those bullish of the Japanese yen. In the absence of effective action to prevent the wheels of recovery from falling off the domestic recovery, dealers continue to push the yen back towards its recent heights versus most currencies. The dollar has weakened since Friday from ¥82.27 to ¥84.70 while the euro dropped from ¥108.59 to ¥107.52 this morning.
Euro – The euro has only just declined through $1.2700 against the dollar for the first time since before the Jackson Hole speeches on Friday. After the positive words and a lack of gloomier references, the euro rose to a peak at $1.2780. Data released earlier in the European session remained a relatively buoyant stance but was not enough to push the euro in either direction. The July Eurozone business climate indicator rose modestly from 0.61 to 0.66. Meanwhile a variety of indicators expressing the current level of confidence across industrial, consumer and services sectors were all largely unchanged.
British pound – The British Chambers of Commerce revised upwards its projection of growth for the U.K. economy for this year and next, and provided a fillip for the pound to start the week. The pound rose versus the euro to 81.72 pence as dealers continued to point to firmer forward-looking growth for the British recovery rather than that of the Eurozone. Despite a second monthly decline in home prices across the nation for August, the pound also managed to rally against the dollar to $1.5539.
Aussie dollar – The Aussie was disappointed by the efforts of the Bank of Japan to stimulate the domestic economy. Having poked its head above 90.00 U.S. cents on Friday as optimism recovered, investors today shelved the recovery for the Aussie and sold it back to 89.58 cents. Evidence that the RBA’s monetary policy is biting was further apparent in data showing a second monthly decline in new home sales, which declined 7% in July. Meanwhile second quarter operating profits for Australian companies surged 18.9% and outpaced expected growth of 5.8%, which would have been an improvement on first quarter gains of 4.3%. Slightly worrying was the contraction in inventories of 0.5% and perhaps underscoring a slowdown in global demand.
Canadian dollar – Both gold and crude oil prices have rebounded sharply from last week’s lows and have supported a rally in the growth-sensitive Canadian dollar. Today, the loonie rallied to 95.46 U.S. cents for the first time since one week ago. It’s currently pared its advance and has come back to unchanged on the day at 95.00 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLCNote: 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.