The British pound is proving to be the exception today as dealers’ appetite for anything other than the dollar steps up. The whiff of further quantitative easing is heavy in the air and dealers remain cautious ahead of the release this afternoon of the Fed’s Beige book representing snapshots around the Fed’s 12 regional districts.
Ahead of a G20 summit at the end of the week, Bank of England Governor King warned not to expect too much as a result. He noted that the summit represents a natural forum for individual opinions but warns that a “real revolution” is necessary for global nations to arrive at what he called a “grand bargain.” Mr. King also warned that the world economic order has to change in order to survive. As is typical during any crisis, a government becomes self-absorbed in saving its economy. The result is competitive devaluations that can only result in trade protectionism. What’s needed is for nations with a low savings ratio to weaken spending while countries with persistent current account surpluses must drop a reliance on export success instead encouraging domestic spending. His use of the term “revolution” is appropriate and we shouldn’t expect such a change this weekend.
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British pound – The words from Governor King were delivered yesterday to British business leaders who were keen to learn more of the potential for easier domestic conditions as the economy slows. Today’s monetary policy meeting minutes were dovish and essentially served as a crowd-warmer before the main act. As expected, the MPC was split three ways. Adam Posen proposed an increase in the currently exhausted bond purchase plan of £50 billion while Andrew Sentance stood by his call for an immediate 25 basis point interest rate increase. The majority, however, felt that while further monetary stimulus is likely to be needed in order to keep the inflation trajectory from falling below target, the balance of risks hadn’t sufficiently shifted yet. The prospect of a further ease is now weighing on the pound, which fell against the dollar, yen and euro.
U.S. Dollar – Further hints about the need to adopt further easing in the United States may be dropped in a couple of forthcoming speeches by Federal Reserve speakers today and tomorrow. Richmond Fed Chief Jeffrey Lacker speaks today while St. Louis Fed President Bullard addresses his audience on Thursday. The dollar index is under some selling pressure today and is down by 0.7% at 77.70.
Japanese yen –After slipping on Tuesday to a four-session low the yen is back on its feet today and has improved per dollar to stand at ¥81.32. To some extent the optimism surrounding the dollar in light of yesterday’s decision by the Peoples Bank of China to raise interest rates has worn off.
Aussie dollar – In the panic-stricken aftermath of the Chinese measure to curb growth in bank lending, the market’s mood suddenly shifted from risk-on to risk-off dragging the Aussie from right next door to parity with the dollar to 96.62 U.S. cents according to Interactive Brokers data. The near two-week low has prompted a buying spree on Wednesday in light of the subtle hint from the Reserve Bank that a further rise in interest rates is necessary at some point. The Aussie surged in morning trade in New York to 98.03 cents even after a Westpac leading indicator showed a minor downturn in future activity across the economy.
Euro – The euro has rebounded from Tuesday’s twice-tested session low at $1.3700 and was buoyed by hawkish comments from ECB member Juergen Stark. The euro rose to $1.3872 after Mr. Stark warned that central banks should avoid buying bonds in markets which had yet to return to a fully functioning manner. He also noted the potential for a perverse impact on governments if monetary policy was kept artificially low. He pointed to a lack of incentive to restructure national fiscal policy in light of loose monetary policy.
Canadian dollar – The Canadian dollar is matching the performance of the Aussie unit as risk appetite revives following a bad day for commodity prices and equities on Tuesday. The unit rose to 97.09 U.S. cents in early New York trading.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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