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Getting Better!
By Mike Conlon | June 14, 2010
Global recovery appears to be gaining traction, as regions around the globe are reporting increases in economic data consistent with growth. As we’ve made it through another weekend without any European debt landmines exploding, the market is in risk-taking mode this morning.
Industrial production figures in the Euro zone came in better than expected driving world stock markets higher. Oil prices are back to the $75 level as improved outlooks for recovery are beginning to take hold.
Japan started it monetary policy meeting this week, and are expected to announce no change to its interest rate tomorrow.
Global financial regulation is now at the forefront as governments around the globe consider how to best tackle the financial markets and the mistakes of the past.
This is a light week for news, but we’ll get some CPI data from both the UK and the US which should give an indication of where we stand with regard to inflation.
In the forex market:
Aussie (AUD): The Aussie is higher on increased risk appetite as the lack of potential Euro zone related negative news has pushed world stock markets higher. Minutes from the RBA policy meeting will be released tomorrow, which should provide an inside view as to future rate policy. Expect the Aussie to trade on risk themes as there is a lack of news expected from down under this week.
Loonie (CAD): The Loonie is also higher on risk-taking getting a bid from increased oil prices which is back trading above the $75 level. The Loonie is heading back toward parity with USD, trading at its highest levels in nearly a month to 1.0275 vs. the Dollar.
Kiwi (NZD): The Kiwi is also higher on risk-taking despite the fact that retail sales figures came in showing a decline of .3%, which was slightly worse than expected. Nevertheless, the RBNZ is expected to continue to raise rates throughout the year. However, RBNZ honcho Bollard said that a higher Kiwi is not helping the NZ trade balance. The Kiwi has gained roughly 7.5% on the Dollar in the past year.
Euro (EUR): The Euro is higher to 1.225 vs. USD this morning as another weekend free of negative news has buoyed the common currency higher. Industrial production figures came in much better than expected, increasing .8% vs. an expectation of .5%. As I’ve mentioned time and time again, a lower Euro is going to be good for Euro zone exports provided they can shore up their banking system and prevent the debt crisis from getting worse. This still poses the largest risk and impediment to world economic recovery.
Pound (GBP): The pound is on the move higher this morning on risk appetite as the market is increasing its bets that a UK rate hike may be forthcoming sooner than later. The CBI came out with a report predicting faster economic growth and a narrower than expected budget deficit which may spur inflation causing the BOE to raise rates. British CPI figures are due out tomorrow which could push the Pound higher if inflation is viewed as gaining. Jobless claims are due out on Wednesday.
Dollar (USD): The Dollar is lower on risk appetite, as traders are seeking yield and abandoning the safe haven currency. PPI figures are due out on Wednesday, followed by CPI figures on Thursday.
Yen (JPY): The Yen is lower on risk appetite as carry trades are re-established after a non-eventful weekend in the Euro zone. A familiar pattern is developing, where traders take risk off before the weekend and then re-establish carry trades if there is no further bad news. In addition, Japanese stocks are higher as manufacturers said that the business climate has improved paving the way for further business spending to expand upon the already-flourishing export led recovery.
The number one driver of fear in the markets is the debt situation in the Euro zone. As a reader of this blog, this should come as no surprise to you. Every day that goes by without a major issue is one in which the markets will gain confidence in recovery.
We are seeing some good signs of global growth; however all of this can be derailed with one negative report from the Euro zone. The debt crisis has not gone away and the Euro zone banking system is still very fragile. Economic numbers should improve as a lower Euro will be good for business in the region.
Meanwhile, the economic data will continue to pour in. Low interest rates around the globe may need to rise if inflation starts to heat up. Debt reduction plans and reduced spending must be balanced with sound monetary policy. Central bankers walk a fine line between trying to encourage economic growth and reducing deficits.
But for now, the market appears to be content with this balance today. So ride the wave but be prepared to bail at the first sign of trouble!
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