Relief over the likely successful conclusion to the U.S. debt-debacle seems to have been confined to an end-of-day rally on Wall Street on a day marred by a further convincing sign that the economy remains dogged by lackluster growth. So entrenched is this current bout of weakness that the Australian central bank appears to have put global growth concerns ahead of medium-term worries over inflation causing an evaporation of fears that interest rates in the nation will rise. Those same concerns once again caught the glare of fearful investors in Euroland as dealers considered the impact of a lack of growth on still worrisome budget deficits.
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Aussie dollar – The Reserve Bank of Australia maintained its 4.75% benchmark short-term rate of interest on Tuesday going to great pains to highlight the slowing pace of global growth. While it said it remained concerned by the outlook about inflation over the medium-term it kept rates unchanged for an eighth-straight meeting because it argued that it made sense under such conditions “for monetary policy to exert a degree of restraint.” The Aussie slid in response as interest rate expectations turned to dust. There was a massive move in short-term yield expectations as a result while both two and 10-year government bonds surged. For the first time in two-and-a-half years, the cash yield on the 10-year bond closed below the Bank’s short-term lending rate indicative of exactly how resolute the money market is about no further tightening in policy this year. The Aussie slid 1.1% and buys $1.0846 U.S. cents.
Japanese yen – The Nikkei newspaper carried a story that provoked a government response to the suggestion it was on the cusp of intervening to restrain the Japanese yen. The Nikkei said that at this week’s two-day Bank of Japan meeting central bankers would mull measures to further ease monetary policy and said the Bank was ready to sell the yen. However, an unnamed official told reporters that the government had not yet decided on specifics to conduct its foreign-exchange policy while it remained in regular contact with overseas sources. Japanese stocks fell overnight with no let-up in sight for the health of exporters’ earnings as economists mull the impact of U.S. spending cuts on the global economy. The yen is, however, lower versus the dollar on the persistent threat of intervention and last traded at ¥77.33. The yen rose against the euro to ¥109.64.
U.S. Dollar – The dollar rose after congressional leaders agreed to raise the debt-ceiling and ahead of a Senate vote later on Tuesday. With several recent signs of weakness in growth within the world’s largest economy, investors are now more nervous over the slowdown with $2.4 trillion in spending cuts likely over the next decade. The dollar index rose as equity index futures slumped following stocks in Asia and Europe lower. The index rose by 0.5% to 74.65 ahead of personal income data with auto sales reports due later in the morning.
Euro – The potential negative impact on U.S. growth resulting from the debt-ceiling accord built on signs of weakness across factories around the world and served as a catalyst to hone attention back on to the plight of peripheral Eurozone economies. Lackluster growth the world over is entirely the wrong recipe required to heal budget deficits around the region and investors once again slammed the single currency as the reality of moving to a lower growth trajectory rolled over. The unit fell toward its lowest in two-weeks against the greenback reaching a session low at $1.4152 while it also put in a historic low against a surging Swiss franc. The euro also lost some momentum after a report showed a step back in the pace of costs faced by producers. The June producer price index was unchanged in June and eased to an annual pace of 5.9% and disarming the ECB from arguing on behalf of a third rate increase at Thursday’s meeting.
British pound – Sterling’s run of strength against a dollar pinned against the ropes by political ambition appears to be running its course. The pound had held up reasonably well as an alternative to the single European currency in the face of a stringent fiscal policy that is likely to rob the nation of significant growth. Indeed trade body CBI on Monday reduced its 2011 GDP forecast to 1.3% from 1.7% while leaving its 2012 projection of 2.2% unchanged yet sticking out like a sore thumb. It’s hard to know where that level of growth will come from next year when the economy is only just starting to feel the pain of 500,000 public job losses. The pound reached its lowest versus the dollar in eight sessions at $1.6229 while rising per euro to 87.24 pence.
Canadian dollar – In the first hour of New York trading investors finally turned attention to the Canadian dollar sending it to its weakest level in almost three weeks. After largely being ignored in the European session dealers targeted the unit on fears for contagion from weakening growth across the divide in its largest export market. Weakness in manufacturing output around the world in recent PMI surveys have also undermined the price of crude oil, which is also down again on Tuesday. The Canadian dollar currently buys $1.0392 U.S. cents from a close on Monday at $1.0438 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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