Investors are lining up currencies according to which central banker is most likely to exit first from an era of ultra-easy monetary policy. As inflation pressures mount on account of rising demand for the relatively fixed supply of commodities around the world, some central bankers flinch faster in fear that the problem becomes entrenched within consumers’ thought processes. Today the euro is higher as investors revel in the prospect that today’s 1% short rate is soon to be 1.25% and are pinning their hopes on prospects for more inflation-busting changes from the European Central Bank.
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Euro – On the eve of the ECB meeting at which it will turn its back on generously low interest rates, investors are piling into the euro for precisely the wrong reasons. Most importantly is the remaining threat of sovereign debt crisis, which feels like water torture to onlookers. But the market is not heeding Trichet’s warning at the March meeting when he told reporters that it would be a mistake to project that any rate rise would mark the start of a string of increases. Today investors appear to be expecting more as they drive the single currency up to $1.4316 and its highest in 14 months against the dollar. Eurostat confirmed that GDP for the fourth quarter grew by 0.3% moving the economy forward by 2% last year. The euro’s advance wasn’t confined solely to the dollar, but also strengthened to an 11-month high versus the yen at ¥121.75.
Japanese yen – The yen has problems of its own and one of the biggest forex market myths of all time is rapidly revealing itself. The Japanese government predicted it following the earthquake. Former currency minister Sakakibara warned it might happen and the Bank of Japan had to act against raging market forces in a bid to prevent a self-reinforcing rumor-mill from strengthening the yen. The towering fear that Japanese investors would dump assets around the world and convert proceeds back into the yen driving its value ever-higher turned out to be bogus. The government said shortly after the earthquake that it expected two outcomes: A falling yen and rising bond yields. Today the yen slumped to its weakest against the dollar in six months at ¥85.50 while it also weakened to ¥88.71 versus the Australian dollar to its lowest in two-and-a-half years. A major myth-buster is the fact that the Bank of Japan seems to be the most likely candidate to become the gatekeeper at the house of quantitative easing. They are most likely to be the last one in the mansion as global central bankers exit one after another leaving it to turn out the lights. I hope they have enough light bulbs in the closet.
British pound – Back to its old tricks, flags were raised for the pound after a spurious house price report earlier only to fall right back down the flagpole when real data showed cracks in the economy. The trouble-maker today was an unexpected slide in industrial activity during February. A pair of readings showed industrial production slid 1.2% leaving annual activity higher by 2.4%, while manufacturing output was unchanged between months and 4.9% higher than a year ago. Back revisions lower in both reports merely rubbed salt in to the wounds and made a fool out of buyers who drove the unit to its highest against the dollar in two weeks touching $1.6363. The session high followed a Halifax house price report showing a monthly gain of 0.1% for March after a price decline of 0.9% in February. The pound subsequently slid by a penny and continues to trade lower against the dollar on the day.
U.S. Dollar – The dollar index is 0.4% weaker despite gains for the greenback against the pound and yen. The real focus today remains on the euro where investors are buying into that string of monetary tightening that might be dashed as soon as the ECB discusses its stance following the lunchtime press conference in Frankfurt on Thursday. The FOMC minutes did little to undo the theory that members will have plenty to fight over at April’s monetary policy meeting. Still, investors recognize that while the ECB will change policy tomorrow, the Fed has several steps to take in removing barriers before policy rates can officially move higher.
Aussie dollar – The local dollar is higher propelled by carry-trade plays with market talk of Aussie/yen purchases by large names and central bank interest in Aussie government paper. A seven-year auction of such paper yielding 5.5% has more than five-times oversubscribed according to the debt management office. The Aussie rose strongly in overnight trading to buy $1.0395 and so remains near its all-time high. Data showed home loans during February declined by 5.6% but was largely discounted on account of the impact of flooding and cyclones.
Canadian dollar – Risk appetite is on, commodities and equities are gaining in value and speculative forces are producing windfall revenues for Canadian oil producers. The surging Canadian dollar keeps moving ahead and once again hit a four-year high on Wednesday. The unit today extended its gain to $1.0415 U.S. cents. Later this morning investors will learn of the impact on manufacturers from the strong currency in the Ivey PMI series for March.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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