Market fears are creeping insidiously out of the wood work as fractious central bankers try to explain where their colleagues are going wrong and as bank economists rein in their growth forecasts. The morning seems completely void of any kind of silver lining with each and every one of investors’ earlier fears sitting rather unappetizingly on the plate in front of them. The dollar is up while stocks are substantially lower. Commodity prices are slumping and rising bonds are creating record lows for yields. It’s an ugly site that remains and one where few can agree on how to pretty it up. There are plenty of headlines covering Fed-dissenter Charles Plosser in Thursday’s media. He sums up more than just the problems facing the Fed: “What we did isn’t going to work,” he said. “Our problems are not problems easily addressed by monetary policy,” he said, adding that the Fed is “risking its credibility because it’s doing things that don’t work.”
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U.S. Dollar – Charles Plosser was one of three voters at the FOMC who recently dissented with colleagues as the thrust of its policy statement was changed from ‘extended period’ language to define March 2013 as a minimum for virtually zero interest rates. Along with Richard Fisher, the pair on Wednesday spoke out about giving the appearance that the central bank was trying to protect stock market investors by changing the wording in the statement directly after the stock market crashed. The crash was caused by an S&P ratings downgrade for the U.S. Mr. Plosser is actually relatively bullish about the economy and in part argues against further stimulus because he predicts the economy will grow between 3-3.5% in 2012. In all likelihood he is probably well off-track and his recent take is being interpreted as bearish on a day when Morgan Stanley cut its global growth forecast mainly on account of poor and slow policy responses to the debt-crisis in the Eurozone. The weaker growth profile on the continent also inspired a growth downgrade for China, which was reinforced by the same from Deutsche Bank. The dollar was already higher on safe haven grounds ahead of a stronger-than-hoped for consumer price report earlier, but continued to march forward after initial claims data also missed its marker. New unemployment claims rose to 409,000 while those made in the previous week were revised higher to 399,000 offering little solace to econ-bulls hoping for the labor market to prove the bears wrong. The dollar continues to hold its own as a safety play alongside the Swiss and Japanese alternatives where investors have become increasingly concerned lately about the prospects for further intervention.
Japanese yen – Officials from the Finance Ministry met with counterparts at the Bank of Japan today perhaps to discuss preparedness for further intervention to stem the power of the yen. The rising yen impacts the earnings of exporters as they convert overseas earnings back in to yen. Data overnight showed that exports from the nation dropped by 3.3% in July after falling by 1.6% in June clearly showing the impact of a rising currency. Ever-cheaper imports meanwhile continued to flood in at a 9.9% pace and similar to a gain during June. The yen remains in a narrow range against the dollar with dealers wondering who might dare unleash the wrath of the Bank of Japan as the unit heads towards its ¥76.25 March-time low. The dollar currently buys ¥76.61 yen.
Euro – When you look at a chart of the euro you realize just how patient investors have been with delinquent European authorities, who collectively have failed to ring fence the region’s debt crisis. The single currency has been favored by most over the dollar in what many term ‘an ugly contest,’ on account of the Fed’s willingness to travel farther down the quantitative easing path. Many observers look at that policy incorrectly as ‘printing money’ and conclude that the Fed is swamping the supply of dollars. A Wall Street Journal article this morning stated that the New York Fed was in discussion with local officers at European banks to discuss their liquidity sources and to better understand their ability to maintain operations should stresses rise. The confirmation arising from this week’s Franco-German crisis talks that a euro bond agency was not on their to-do list has also undermined confidence in the euro. The euro’s recent buoyancy seems to be linked more to dealers awarding the authorities the benefit of the doubt in reaching solution, which is could be a disastrous game to play. The euro swooned in light of fresh weakness in U.S. data on Thursday to reach $1.4274 as demand for the dollar picked up on the back of tremendous weakness in equity prices.
British pound – The pound continues to look remarkably resilient in the face of continued economic weakness. Retail sales data released earlier rose by less than hoped for to gain 0.2% in July over the prior month. Excluding sales of fuel, sales were lower by 0.2% on the previous year. Until Thursday the pound had risen against the dollar for five sessions, but the weaker form of the data and a rally in the dollar caused it to backpedal to as low as $1.6424 having reached $$1.6553 earlier. The pound also continues to offer solace to investors seeking shelter from the European unit rising to 86.96 pence per euro.
Aussie dollar – Selling of equities that started in Asia after Morgan Stanley pulled the rug from underneath the feet of global growth followed-through in the U.S. time zone. Risk appetite was simply shunned following a slump in the Philly Fed’s gauge of economic activity, which reached -30.7 after recording 3.2 last month. Most disconcerting was the new orders index with just fell off a cliff. Demand for Aussie cratered as a result followed equity prices lower. The Aussie earlier reached $1.0357 U.S. cents for a two-and-a-half cent loss on the day.
Canadian dollar – From a midweek high at $1.0227 cents the Canadian dollar has slumped smartly to buy just $1.0060 as risk appetite curls up to die in the corner. A plunge in crude oil prices accompanied by the weakening picture of health in the U.S. economy weighed heavily on the loonie on Thursday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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