In our world of FX Mondays are more often than not quiet days on the market with little in the way of major news events impacting on the price of our favored currency pairs. However, despite the lack of scheduled high impact data releases, the day was anything but quiet. As predicted in our post of yesterday the St. Louis Fed's Bullard discussing the U.S. monetary policy and economy, provided one of the key discussion points of the day…
Bullard discussed aspects of U.S. economic performance, characterising it as displaying slow but steady growth, having improving labor markets and limited financial market excess. However, “Inflation in the U.S. has surprised to the downside,” Bullard added. “This configuration of data suggests that the Federal Open Market Committee (FOMC) can continue to pursue its aggressive asset purchase program,” he said.
The U.S. Economy
Bullard noted that labor markets in the U.S. improved relative to the data available when the FOMC decided to initiate its QE3 program in September. NFP (non farm payroll employment) grew by an average of 190,000 per month from September 2012 to May 2013, up from an average of 141,200 per month from March 2012 to August 2012.
Inflation has been low, Bullard said. Commodity prices have been soft over the past year, this may be due in part to the recession in Europe and slower-than-expected growth in China. He added that core inflation (which excludes food and energy prices) has also been low in the U.S. “Low inflation may give the FOMC more leeway to continue its aggressive asset purchase program,” Bullard said.
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“An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.” While the Dodd-Frank Act is meant to help contain some dimensions of this activity, “Still, this issue bears careful watching: Both the 1990s and the 2000s were characterized by very large asset bubbles,” he added.
Turning to monetary policy, Bullard noted that the FOMC is currently authorising asset purchases of $85 billion per month through its QE3 program. He added that the flow rate of purchases is now widely regarded as the key aspect of meeting-to-meeting policy choices.
“Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame,” Bullard concluded.
So, the bottom line is that Bullard, as a key representative of the Fed, sees plenty more scope for the current easing and stimulus programme to continue, squashing the various rumors that manifested last week that the Fed may taper their latest round of Q.E. earlier than first thought, or before unemployment reaches its key level of 6.5%. The reaction of the DJIA was neutral, the market closed fractionally down by 0.06%.
The reaction by our favoured currency pairs was more dynamic; the dollar made steady gains throughout the day, eur/usd finished up on the day, aus/usd finished down on the day, dollar fell versus sterling. The dollar index was flat which could represent a potential turn in sentiment versus the dollar which would be revealed versus its major peers. Logically, given Mr. Bullard's comments, a fall in dollar value would be appropriate. However, given the correlated remarks emanating from other central banks operations, calling a currency's direction at the moment is proving increasingly difficult. This difficulty became apparent as Mr. Draghi, the president of the ECB, also gave a speech on the day which addressed similar issues and concerns to that on Mr. Bullard's mind…
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Mr. Draghi; "I guarantee to not use higher inflation rate to solve the Eurozone debt crisis". The statement could not have been more unequivocal.
.The ECB will not intervene in bond markets to ensure the solvency of a country.
. Thereafter, rates will rise again, once confidence in economic recovery returns.
.The ECB has bought fewer bonds than other central banks.
The last part of the statement is fascinating given that many analysts will contend that Draghi is correct on this single issue; the ECB has kept a lot of its gunpowder dry, certainly in stark comparison to the USA Fed and Japan's bank of Japan.
Key economic releases and events on Tuesday June 11th which could affect market sentiment.
We have three key releases/events that traders need to be aware of. Firstly a scheduled BOJ press conference has yet to be re-confirmed, however, if past performance is any indication then the potential for volatility is high.
The second key event for the day, rating as high impact, is the German constitutional court ruling. In layman's terms this will determine whether or not the German govt has acted constitutionally in relation to assisting the Eurozone in the various fiscal and monetary initiatives designed to rescue the continent from its deep recession. The anticipation is that the court will rule in favour. If not the negative impact on the euro versus its peers could be dramatic. If the ruling is positive the impact could, and we emphasise "could", be less.
The final event that could affect the markets for sterling concerns the UK's latest release of manufacturing and industrial production. The economists questioned are predicting negative numbers for industrial production and flat numbers for manufacturing. A reverse from the last month's figures that were both positive.