Tuesday's FOMC statement will be closely watched to see what the world's largest central bank might have up its sleeve to make investors' pain magically disappear. But with central bankers around the world recently carrying out various forms of intervention even before global stocks fell for a second day, one wonders what tricks are left. Such are the forces in motion that any action can only be seen as being consigned to stemming powerful moves without addressing underlying problems.
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U.S. Dollar – The dollar declined against a basket of its major trading partners as equity index futures staged a strong pre-market rally. Investors are hopeful that the recent slide in stocks exacerbated by an S&P ratings downgrade will inspire the FOMC to announce further stimulative measures to restore growth and confidence in markets. Should they do so, this might be seen as negative for the dollar. The burning question ahead of the Fed’s statement is what it will do to stop the bleeding. The Fed is one of those places where cooler heads prevail and we might all be in for a surprise if the statement simply notes that the weekend downgrade provided one of those external shocks it has previously warned against and that it would now monitor the impact on consumer and business confidence going forward. It may also try to talk up the latest labor market release as an encouraging strand of evidence. In short, the FOMC will probably not announce further policy measures today despite the plunge in stocks for fear of pouring fuel on the fire. It may, however, warn that it stands ready with an open wallet in the event that recent market turmoil negatively impacts business activity.
Euro – The euro benefitted from hopes that the Fed might resort to further quantitative stimulus or at least state that it stood ready to maintain its open doors for an extended period. The euro rose to $1.4275 while rebounding also against the British pound to buy 87.36 pence. There was further evidence of a slowdown in the form of weaker than predicted German exports during June where a 1.2% dip contrasted against a rise of 4.4% during May. And although a 0.3% increase in the level of imports was higher than forecast, it was nevertheless moribund.
British pound – The pound is marginally higher against the dollar at $1.6339 and is relatively weak given its recent performance as a safe harbor within Europe. But maybe the better tone to the euro is today weighing around its neck and preventing an advance. There were also signs of weakness in today’s manufacturing data where industrial production stood still during June following a downwards revision to May data. Overall the year-on-year pace of change represented contraction of 0.3%. Manufacturing production also disappointed with output falling unexpectedly by 0.4% to leave the annual pace of change at 2.1%. In a further sign of a challenging external environment the trade deficit widened to £4.5 billion from £4.0 billion despite expectations it might narrow.
Japanese yen – Yen strength continued as Asian stocks slid violently at the start of trading across the region. Losses were pared by the close but it was still an ugly day that resulted in an advance for the yen on safe haven grounds. The unit came within a quarter of a yen of reaching the price at which the Bank of Japan last week stepped in to sell it causing a three-yen decline against the dollar. Traders were hesitant earlier despite the clear pattern of risk aversion. While the central bank’s actions may not have been successful in reversing the path of the yen just yet, they may have done enough to deter another challenge after buying $58.4 billion to prop up the dollar. The dollar earlier rose from ¥77.00 to buy ¥77.64 at the day’s best.
Canadian dollar – While the market was busy discussing the potential for an imminent monetary tightening just one-month ago, sustained weakness in the world’s stock markets has caused investors to reverse their bets resulting in weakness for the Canadian dollar. The biggest headache for the Bank of Canada is the sensitive nature of the external environment where ripple-waves from financial disruption abroad can result in severe shocks being felt across the domestic economy. Earlier on Tuesday the local dollar finally crossed beneath parity as investors pared riskier positions before the loonie stabilized buying $1.0065 U.S. cents.
Aussie dollar – While the Canadian dollar might have given back a nickel against the greenback since the beginning of August it’s the mighty Aussie dollar that has fared worst. It has lost 10-cents in the same time and finally dropped momentarily through parity with the U.S. dollar on Tuesday. The unit was hindered by strengthening Chinese inflation data as well as weaker domestic data depicting weaker demand for credit. Home loan data for June was unchanged despite expectations of an increase after rising by 2.8% in May. Investment lending almost fully reversed course by lurching 4.4% lower after rising 5.4% a month earlier. The Aussie reached as low as 99.27 U.S. cents before rallying into a more positive start to trading in New York where it reached $1.0256 cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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