The weekend news was rather sparse as the Greeks got their trust fund check from the overlords in Brussels. The Greeks need to be leery of Eurocrats bearing gifts. The Sunday news shows in the U.S. highlighted the vast chasm between Speaker Boehner and Secretary Geithner. There was finger-pointing all around about as to which group was holding up the negotiations as to affect genuine compromise and a resolution to the fiscal cliff. As the rhetoric heats up, the S&Ps and global stock indices all closed higher on the week, showing that the price action speaks louder than words. The market has fears that failure to resolve the fiscal crisis will result in a new U.S. recession and will also undermine the global economic recovery, but yet the COPPER closed above the 200-day moving average for the first time in many weeks. Other industrial metals also performed well last week making me wonder if all the fiscal cliff rhetoric is missing some larger picture. We will watch to see if the COPPER can sustain its recent strength or whether we are in the midst of a short covering rally.
***This week there are FOUR central bank meetings. First, the RBA will announce its intentions and the market is evenly split about the Aussies cutting interest rates. The overnight rate is 3.25% and the market has priced in a probability of a cut to 3%. The 2/10 yield curve in Australia is still a flat 49 BIPS so a rate cut is certainly called for but the Aussies have held firm before, especially as there has been some recent strength in the Chinese data. If the RBA stays at 3.25% the Aussie dollar will rally while a 25 basis point cut will probably mean a very short-lived break.
Second, the Bank of Canada announces on Tuesday morning and is expected to hold rates steady at 1%. The BOC statement will be of interest because Governor Carney is leaving to take the post as Governor of the Bank of England. Will Mark Carney take the moment to set out a course of action for his replacement to follow? The BOC has been concerned about the dramatic increase in consumer debt in Canada and we will be attuned to any type of actions to rein in credit, especially in the housing sector.
Third, the BOE will announce on Thursday and no change in rates or the QE program is expected. The interest rate announcement will follow the Wednesday speech on the Autumn Budget by Chancellor of the Exchequer George Osborne. Britain’s tight fiscal policy is under fire from British economists but Mervyn King seems to be leery about using greater doses of QE at this time. If Chancellor Osborne eases up a bit on the budget austerity then the BOE will certainly maintain the present monetary policy.
Fourth, the ECB will reveal its interest rate decision also on Thursday morning with a Draghi press conference to follow. The ECB is expected to leave the overnight rate at 0.75% and President Draghi seems content as the European yield curves are rangebound and the Greek situation is muted for the moment. Spain is a concern but, of course, Draghi is waiting for the Spanish authorities to make a decision on whether or not they want to meet the terms for a bailout and the use of an Outright Monetary Transaction (OMT). Nothing will be in the ECB statement but the issue may arise at the Draghi press conference. The uncertainty overhanging the “fiscal cliff” will give President Draghi some needed relief from the heat of the spotlight.
***There’s a story from last week with potential to disrupt the markets in 2013. It was reported that Turkish gold exports had dramatically increased as the Turks were using their gold to buy energy supplies from the Iranians. Under the UN-imposed sanctions, it is difficult to move money through the global banking system to Iran. The use of GOLD allows energy buyers to circumvent the rules and thus provide Iran with the ultimate hard currency. The use of GOLD as a global currency opens up all types of global games. If the U.S. DOLLAR were to come under pressure due to FED policy, the Iranians would be enriched. Or, will the U.S. move to push the GOLD price lower if Iran continues to exploit the loophole in the sanction rules? The use of GOLD in lieu of DOLLARS is raising all kinds of possibilities. Just one more variable of which to be aware.
Tags: Australian dollar, BOC, BOE, copper, ECB, Fed, fiscal cliff, George Osborne, Gold, Greece, Iran, John Boehner, Mario Draghi, Mark Carney, Mervyn King, QE, RBA, Spain, Tim Geithner, Turkey, U.S. Dollar