To taper or not to taper, that is the question?
It's fascinating to watch how market commentators and the wider trading world have become embroiled in the latest drama day after day through the mainstream media channels. We had the fiscal cliff back in late 2012, remember that? How the USA economy was going to fall over the flat earth edge of the world if the USA govt didn't sort the economy? A few soothing words and a few meetings later and the issue was healed. Actually that solution was an incredible tipping and pivot point, the equity markets began their record busting run from that point in time. Now the latest meme concerns "tapering the stimulus".
Turn on the tv business channels and the subject is unavoidable; will he, won't he, if he does what will be the effect on the main markets and currency markets? Well perhaps over the next two days, as Ben Bernanke holds court as chairman of the Fed, we'll get more than hot air and platitudes and a definitive answer to the questions. But don't hold your breath as we've entered yet another twilight zone courtesy of American policy making. Our best guess, which is as good as anyone else's, is that Ben will reduce his targets thereby inducing an early tapering. What he has to avoid, and let's not lose sight of the fact that this is the Fed chairman who is obsessed by keeping equity values and the main USA indices high, is a crash. He needs a controlled hot air balloon deflation over a lengthy period.
In more positive and real political news combined with economic maneuvering, the G8 met on Monday. One of the key discussion points is a trade agreement between the Eurozone and the USA. Not wanting to be seen out of that tent the UK prime minister heralded the negotiations as good for the E.U., the very same organisation many of his Tory peers want out of. This would then require a separate script to include the UK in the legal framework of the trade agreement, the USA would have to draft an agreement specifically for the UK. Three words; never gonna happen. The UK would lose billions of trade opportunities should they leave, it would be the shortest economic suicide note in political history.
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Is the euro becoming the new yen?
EUR/USD is being correlated with measures of risk aversion over recent weeks, according to Citibank. Positive correlation between USD and risk on risk off appetite is nothing new, the question is whether the latest price action suggests that the euro is becoming more of a 'safe haven' currency as it has been in the recent past. When the main equities markets, such as the DJIA went up, the dollar was sold. When the markets fell USD became a safe haven. Citi notes that positive correlation between, for example, EUR/AUD, EUR/CAD and EUR/NZD and risk aversion, has intensified of late.
The dollar strengthened versus most of its 16 most-traded counterparts due to speculation regarding the Fed beginning to taper its monetary stimulus. The U.S. currency briefly pared its early session gains, falling versus the euro due to conflicting reports before the central bank starts its two-day policy meeting on Tuesday. The yen fell versus the greenback for the first time in five days whilst equities gained.
The euro at one point climbed to almost a four-month high versus the dollar as data published in the London session showed that the 17-nation bloc’s trade surplus was close to a record level in April. The euro-area trade surplus narrowed to 16.1 billion euros from a revised 18.1 billion euros in March, the European Union’s statistics office in Luxembourg revealed on Monday. This March reading was in fact the most since the common currency was introduced in 1999.
The dollar rose 0.2 percent to 94.51 versus yen at 5 p.m. New York time, after falling 3.3 percent last week; the most since July 2009. Japan’s currency slid 0.6 percent to 126.32 per euro after appreciating 2.7 percent last week, the most since the five days ended July 6. The euro added 0.2 percent to $1.3367, almost the highest since Feb. 13.
The loonie, (Canadian dollar) dropped 0.2 percent to C$1.0186 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0150. The currency reached C$1.0137 on June 14, the strongest since May 14. One loonie buys 98.17 U.S. cents.
Futures on crude oil, Canada’s largest export, traded at $97.90 a barrel in New York after gaining as much as 0.9 percent and falling 0.5 percent. The S&P 500 Index (SPX) of stocks rose 0.8 percent after gaining as much as 1.2 percent.
Record shorts have been placed versus the Aussie according to the COT report.
Futures traders extended record bets that the Aussie will continue falling versus the U.S. dollar, figures from the Commodity Futures Trading Commission from last week showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Aussie compared with those on a gain (net shorts) was 63,277 on June 11th, the most in data going back as far as January 1993. Australia’s dollar has tumbled 8.4 percent in the past three months, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.
Fundamental policy decisions and news events that list as high impact
The G8 meeting enters its second day whilst the Fed begin their first day of the two day scheduled meeting.
ECB president Mario Draghi is due to speak tomorrow, if the past is any future indication of the future he may drop a currency hand grenade into his narrative causing a volatile reaction to the euro versus its major peers.
The UK is publishing key data tomorrow, the ONS will publish the numbers on UK inflation, consumer figures and retail. The expectation is for the CPI, the consumer inflation, to have moved up from 2.6% to 2.8%. Retail is expected to advance from 2.9% to 3.2%. Inflation numbers are also released in the USA in the N.Y. session, the expectation is for the core and retail numbers to remain virtually static.
The German ZEW economic indicator is published early Tuesday morning, predictions are for a rise from 36.4 to 38.2. An increasingly positive figure is likely to impact favourably on the euro given the E.U.'s reliance on Germany as the powerhouse of growth in the region.