This week brings Prime Minister Abe’s fiscal plan, the Reserve Bank of Australia’s rate decision, the Bank of England’s monetary results and U.S. nonfarm payrolls on Friday. So let’s put some perspective to tonight’s main events. The RBA will announce its overnight interest rate and consensus is calling for a 25 basis point CUT to 1.5%. Analysts believe that the weakness in the natural resource sector is aiding the reduction in capital expenditure. Also, Aussie inflation is at the bottom of the RBA‘s target range, which provides rationale for the RBA. I am not so sure of a CUT for this is coming at the end of Governor Stevens’s term at the RBA. Dr. Phillip Lowe will take over September 16 so this is the penultimate meeting for Mr. Stevens.
Posts Tagged ‘Aussie Dollar’
One of the great movies of the 1960s asks who is more insane: Those in the asylum or those who create wars? The present state of central banking can lead one to ask the same question about the overseers of FIAT CURRENCY and those who make investment decisions based on the policies of those academics so in love with their economic models. As the Bernanke victory tour rolls on, the fallback position of the recent anointed savior of the global financial system poses the counter-factual of, “What if we hadn’t acted by embarking on a massive liquidity injection? Aren’t you all satisfied that the unemployment rate is hovering around the defined level of full-employment?”
It was ECB President Mario Draghi who declared war on the German economic model of GROWTH THROUGH AUSTERITY, but it was the Chinese central bank that fired the first real shot in response to the “intervention” by Super Mario. As usual, Draghi proposed an increase in the ECB QE program (possibly in December) and also mentioned taking deposit interest rate even more negative. The EURO, of course, depreciated by as much as 3 percent while Draghi stoked the fires of a possible liquidity increase.
Last Thursday, former Fed Chairman ” surprised” the investing public and announced he was adding a second quiver to his “bagged trophies” and taking on a consultancy with PIMCO to complement his other consultancy with Citadel. Mr. Bernanke claims he can work for investment funds because it does not conflict with his previous role as the key supervisor of too big to fail banks. The former chairman is an active blogger but I assume his blogging will cease when he becomes active with his new employers. Yet on April 30, Ben wrote a post on the WSJ’s Editorial Page Watch. The BLOG was criticizing the WSJ for its editorial, “The Slow-Growth Fed.” In the BLOG Bernanke takes the WSJ editorial board to task for criticizing the Bernanke Fed for overdoing QE and its failure to stimulate GDP. Bernanke takes cover by arguing that the WSJ has been wrong in its forecasting because it has argued on its op-ed pages that the FED’s QE policies were going to cause a “… breakout in inflation and a collapse in the dollar since 2006….”
This afternoon the little bank from down under announced it was raising its overnight cash rate (OCR) by 25 basis points to 2.75%. There is no question that the New Zealand economy has been growing (as has private credit for housing) but the KIWI has been elevated by the strength of the economy and the huge global demand for New Zealand commodities–dairy and other agricultural products. Previously, the RBNZ has refrained from raising the OCR because of the strength of the KIWI versus the Aussie dollar and other commodity-based currencies. But the improvement in global financial conditions gave Governor Graeme Wheeler reassurance for increasing the interest rate. Wheeler noted that “the high exchange rate remains a headwind to the tradables sector. The bank doesn’t believe the current level of the exchange rate is unsustainable in the long run.” The market had been expecting the Bank to raise rates so the initial market reaction was a short selloff but within two minutes the KIWI was trading higher and actually closed on its high of the day in the spot market. If the RBNZ doesn’t intervene, which it shouldn’t, the NZ currency should hold up on the crosses, especially with the high yield on its 10-year note. Finally, one bank breaks out of the pack, even in the face of a potential slowdown in China.
ECB President Mario Draghi has been able to convince the world that the Euro’s problems have been contained and it is safe to re-enter the financial pool of credit assets throughout Europe. The July 2012 speech that proclaimed the ECB had no taboos and would “do whatever it takes” to preserve the euro has been a masterpiece of doing nothing while generating the desired outcome. The master plumber of all things credit (JA) alerted me to the ECB’s balance sheet (as seen on the Bloomberg terminal). After Mario Draghi pledged to offer the Outright Monetary Transactions (OMT) to any European country that contracted with the ESM or EFSF for help, the sovereign debt markets in Europe have quieted and yield spreads returned to a sense of normalcy. Many people believed that the euro currency would suffer from Draghi’s promise of massive liquidity to meet funding needs. The EURO shorts were wrong and the proof lies in the three charts I am providing.
Over and over, financial news airwaves are filled with noise about since the Bank of Japan–under the supervision of Governor Kuroda–has embarked on a massive dose of Quantitative Easing, there has been no real outflow of YEN around the world. The only problem with this bloviating is that its devoid of fact. The BOJ’s action, or rather, call to action has led to a drop in European bond yields as well as a new pillar of support for U.S. Treasuries. Further proof is last night’s employment data from Australia, which was much weaker than expected (a 36,000 job loss and a 0.2% jump in the unemployment rate to 5.6%), but the AUSSIE DOLLAR rallied after an initial selloff as Japanese investors are seeking higher returns. A favorite place for higher yields for Japanese seekers has been Australia and New Zealand. Many financial institutions offer what are known as Urudashi and Samurai bonds. These are bonds issued in Japan in foreign currency of usually kiwi and Aussie. Those who say that the Japanese don’t invest afar and remain in Japan–what is called HOME BIAS–are badly misinformed.
Give the pollsters their due. They were virtually perfect in the predictions of electoral outcomes. Can the electoral algos now reduce all that data and tell us the policies that will be produced to deal with the problems that plague the U.S.? The Obama victory was greeted by a market selloff as the investment world woke up to the possibility of tax increases and spending cuts leading to a recession and decreased profits. The elections were widely anticipated as the bookies in London and worldwide had predicted. I am left scratching my head, wondering what caused the steep decline in the U.S. equity and commodity markets? The EURO currency was not sold hard enough to think that the Greek situation was the catalyst. Besides, the Greek parliament passed the austerity budget tonight. There is no way that Europe will not provide the Greeks with the promised funds as the outcome would not be worth the 30 billion euros that are in question. If the Obama victory and coming government standoff should have led to a selloff in the BONDS for one would have to be insane to purchase U.S. bonds priced at FED manipulated risk levels.
Following up last night’s post, Arthur left a note on the blog linking an article from Bloomberg Businessweek, written by Brendan Greeley. The language of the article is crystal clear and provides another example of a Euro policy maker claiming far more insight than the collective wisdom of Mr. Market. “Investors ,he told the Bundestag, are ‘charging interest rates to countries they perceived to be the most vulnerable that [go] beyond levels warranted by economic fundamentals and justified risk premia. This fear is “unfounded. The market is wrong.'”
Thursday in Europe the ECB meets to announce its decision on interest rates. The unanimous consensus is for the ECB to hold rates at 1%. This is probably correct for Draghi will not want to be seen as possibly aiding Sarkozy. The reports out of France tonight are that Mr. Hollande more than held his own against President Sarkozy in the only televised debate of the campaign. Thus, with four days to the election the ECB will lay low. If Draghi, though, is familiar with the Wizard of Oz, he would do well to ask for the necessary elements of decisive action.