Notes From Underground

Yesterday, the Bank Of Canada surprised no one as Governor Mark Carney held rates steady at 1%. The BOC statement also maintained last month’s idea that “over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.” The Canadian dollar rallied on the news as it seemed that the market thought the statement would be more dovish following Carney’s comments of October 15, but instead it was steady as it goes. Today, Governor Carney held a news conference and the headline put out by the news services was “Case For Raising Rates ‘Less Imminent,'” which of course led the programmed headline algos to sell the Canadian dollar because of the “dovish headline.” The press conference was so much more than that and really reiterated the BOC statement and reflected the dilemma that the Carney faces in trying to curb private credit growth in a low interest rate world. Nonetheless, the market currency markets kept the pressure on the LOONIE so a risk-off profile was maintained.

The FED released its statement this afternoon and there was very little change in the wording of the FOMC except that “household spending has advanced a bit more quickly” and the notation that “inflation recently picked up somewhat, reflecting higher energy prices.” The higher energy line is a red herring as the FOMC is well aware that WTI prices have dropped $14/barrel since the last FOMC meeting so lower fuel prices are in the offing. The problem with the FOMC release is that no mention is made of the looming “fiscal cliff” rhetoric.

It is important to remember that it was Chairman Bernanke who raised the fiscal cliff issue at the April 25 press conference. Mr. Bernanke noted: “It’s very important to say that, if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that I think there’s absolutely no chance that the Fed could or would have any ability to offset, whatsoever, that effect on the economy.” It was the Fed chairman who put the issue front and center but his recent comments and the FOMC‘s silence is deafening.

Late afternoon, the RBNZ announced that it too was holding the official cash rate steady at 2.5%. This was certainly no surprise as the New Zealand economy is on a steady growth path with low inflation but a strong export market. RBNZ Governor Graeme Wheeler advised that the Kiwis were watching the global financial environment carefully but believes that the present OCR is correct. The market rallied as the KIWI and the all important AUD/KIWI cross from a high of 127.00 early in the day to 126.20, a significant move for a no-action RBNZ. The Aussie/Kiwi cross has been rallying for the last week as the market was heavily short the Aussie on the correction in commodity prices, but “improved” news from China and some calm in Europe forced the shorts to cover. I still believe that the flatness of the Aussie 2/10 yield curve is a warning sign of trouble ahead for the over invested Australian natural resource sector. The Aussie dollar outright is flirting with the 200-day moving average, which has been recent resistance, so be attentive to where the market is in price.

***ECB President Draghi visited his German paymasters on their home turf, the Bundestag. Mr. Draghi was answering question from members of the German Parliament in regards to the Outright Monetary Transactions. The ECB president assured the German legislators that deflation was the bigger concern and thus the OMT ought not be an inflationary problem. As the results of the two-hour visit are filtered down to basics it is thus: Draghi says the OMT program is perfectly within the mandate of the ECB for it is meant to ensure that the European monetary transmission channel is functioning and that all credible borrowers have access to similar rates. The ECB will enforce no FRAGMENTATION of the financial system in order to provide similar credit prices throughout all of Europe. If the Germans don’t like it, sorry but you signed onto the ECB mandate and Draghi is only following orders.

The GOLD purportedly sold off as Draghi mentioned deflation as the biggest problem facing Europe but as I have long argued  deflation is BULLISH GOLD. The world’s central banks will not allow the onset of a deflationary spiral so will use every tool available to protect against a liquidation of assets. Draghi and Bernanke are reading from the same hymnal and will protect against type of 1937 event. Chairman Bernanke is the ultimate ’37er and he promised Milton Friedman never to let it happen again. Gold may be in a correction mode but fears of deflation are not its cause. Last year at this time we had the large correction in GOLD as John Paulson and other hedge funds that had disastrous years were liquidating assets to meet fund redemptions. Look for areas of support for when the algos driven by key word headlines drive the markets to prices with less risk.

****The worst piece of news today was the unemployment data from France. The French do not publish a rate but announced that unemployment increased by 46,000 and rose to more than 3 million for the first time since 1999. This news presents a very difficult dilemma for President Hollande as he tries to assuage the Germans by proceeding with austerity while the domestic economy is struggling. The weaker the French economy gets the stronger the Germans will push as the French will be in need of some financing or pleading for budgetary relief.

Hollande is forced to ally with the Spanish and Italians in counteracting austerity, but Chancellor Merkel is having to promise the German voters that promises of austerity will be enforced. It should be no surprise as to why President Hollande is pushing for a banking union before a fiscal union. This is the major problem for Europe as of now: A slowing France and its ramifications for the entire EU project. It is time to monitor the French bonds versus the German bund and Italian BTP to check for stress developing in the French funding markets.

Tags: Ben Bernanke, BOC, Draghi, ECB, Fed, FOMC, France, Gold, Graeme Wheeler, Mark Carney, OMT, RBNZ, unemployment data

This entry was posted on October 24, 2012 at 7:31 pm and is filed under Central Banks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.