Pound Down, Housing On Tap!
In what I deemed a “light” week for economic news, the big news of the morning is the UK CPI figures. Prices in the UK were slightly lower than expected, with CPI coming in at 3% vs. an expectation of 3.1%. While it is good that there is seemingly no inflation, this could put pressure on the BOE to maintain accommodating measures.
Also this morning we are expecting a slew of US housing data. While no one is expecting this data to improve overnight, any sign that the housing market may be stabilizing is a good thing.
This morning, there is some US dollar strength and mild risk-aversion in the market, as the US stock market rebounded yesterday led by healthcare stocks in the US on the heels of the passage of Obamacare. There is still much debate over the economic impact of this bill; so expect some market volatility if new features come to light.
In currencies:
Aussie (AUD): Not much happening down under from a news perspective; however it is interesting to note that even though the Aussie is paying the highest interest of the currencies I cover here, it is now sliding down the risk ladder and becoming “less risky”.
Kiwi (NZD): The Kiwi is mixed this morning as mild risk aversion is battling a report that shows that economists have raised their GDP forecast for New Zealand. Tomorrow New Zealand is going to report its current account balance, which could show that the economy is picking up steam.
Loonie (CAD): The Loonie is slightly higher this morning in a case of “less bad is good”. With virtually no news on tap for this week, expect the Loonie to move back and forth based on risk themes and bad news from other currencies. The economy in Canada seems to be chugging along and investors are betting that Canada will be the next country to move on rate hikes.
Euro (EUR): Were it not for the Pound, the Euro would be down across the board. The general consensus is that there will not be agreement over aid to Greece at this week’s summit, stoking further fears of structural Euro weakness. And while Greece will be able to get the funding to meet its debt obligations, the question will be at what cost and whether or not it is feasible.
Pound (GBP): To stimulate or not to stimulate, that is the question. The UK is in a precarious position as CPI figures show that prices are declining slightly, raising fears that deflation and not inflation may be the more insidious problem. On Thursday, retail sales figures are due which will show the strength and resolve (or lack thereof) of the British people. Should these figures disappoint, then we could see further Pound weakness in addition to it being down across the board today. At this moment, it is still above 1.50 vs. USD. So if economic activity does not pick up in the UK, then further stimulus may be needed which would add to the already-exploding UK debt which would be Pound negative.
Dollar (USD): The Dollar is stronger this morning primarily on Euro weakness. US housing numbers are coming out later this morning and are not expected to show much improvement. This should give the Fed one more reason to maintain ZIRP for some time. So even though rates are highly unlikely to move in the US for the foreseeable future, the Dollar should continue to benefit from the flight to safety trade.
Yen (JPY): The Yen is lower this morning as carry trades are in effect despite the risk fears in the marketplace. With no sign to the end of deflation in sight, BOJ members are still divided on their views of the economy. In the meantime, Japanese households are sending money overseas in search of yields at the fastest pace since 2007, before the credit crisis. The US dollar looks poised to strengthen vs. Yen, perhaps to the tune of 10%.
As I have mentioned before, one does not need to be the most beautiful to win a beauty contest. Being the least ugly can also win you first prize! And that’s the beauty of the currency market—that it’s a comparison market where sometimes the least ugly can win.
So while economic outlooks across the globe can vary and can seem suspect from time to time, remember that in the New Economy less bad is good!
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