The dollar benefitted briefly after Fed Chairman Bernanke’s failure to emphatically endorse more monetary policy action when he testified to the Senate Banking Committee yesterday afternoon, although the gains proved fleeting as it became clear that he was not too far away from pulling the trigger.
Bernanke confessed that recent data on the economy had been disappointing, that jobs growth was “frustratingly slow” and that both Europe’s debt crisis and the fiscal cliff mooted for early 2013 represented two huge risks for the US economy.
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While being prepared to act if necessary, it is clearly the Fed Chairman’s preference that Washington steps in and resolves the differences over fiscal policy to ensure that the recovery does not come to a grinding halt in the first half of next year. The euro dipped to 1.22 after Bernanke’s testimony but then bounced back just as rapidly to near 1.23. Gold fell back sharply to around USD 1,580 after almost reaching USD 1,600.
Commentary
UK consumers rejoice. Like London buses, UK consumers have had to endure more than two years of misery on the inflation front and now suddenly the good news just keeps on coming. Consumer prices declined for a second consecutive month in June – this has not happened since the final quarter of 2008. Helped by aggressive price discounting on the High Street, especially for clothing and footwear, and lower transport costs, inflation fell by 0.4% MoM in June, with the annual rate now down to 2.4%. Just nine months ago the annual rate of inflation was above 5%, so there has been considerable relief for beleaguered UK consumers. That said, it is not clear how much more good news on inflation there is to come. Much of the discounting in clothes is simply a reflection of the weak demand that forced retailers to start discounting early, so this could be partially unwound in the next couple of months. Also, adverse weather conditions, both here in the UK and in the US, are contributing to higher agricultural prices which will start to feed through (no pun intended) to consumer prices very soon. Finally, oil prices have jumped by around USD 10 over the past month. For now, though, both the BoE and consumers must be pleased that inflation is down to a more sensible level.
Azumi fires a warning shot. Adopting what has become conventional language whenever Tokyo becomes concerned over excessive currency strength, Finance Minister Azumi yesterday claimed he was ready to “take decisive action if needed”. In response, the yen lost some of its bid tone against the dollar, and there was some decent profit-taking on the crosses, with both EUR/JPY and AUD/JPY up by around 1% from the previous day. Clearly, the MoF is becoming impatient with the yen’s continuing strength – in the past four months, the real trade-weighted index for the yen has risen by almost 10%. Azumi’s claim that much of the recent move was somehow “speculative” is misplaced. Firstly, Japan remains the world’s largest net creditor, and as such continues to attract safe-haven flows whenever risk appetite swoons. Secondly, many sovereign wealth funds, institutional investors and high net worth investors continue to diversify out of the euro, preferring to allocate currency exposure to other majors such as the dollar, the pound and the Aussie, as well as the yen. Thirdly, the Japanese economy seems to be dealing with the high exchange rate relatively well. Short of spending some of that massive intervention war-chest, the MoF will probably need to get used to a further gradual strengthening of the yen in the near term.
Some rays of sunshine for the Aussie. After sliding to 1.01 late last week and looking decidedly vulnerable, Aussie shorts have been cleaned out over recent days on the way up to 1.03. Apart from short-covering, three fundamental developments have also contributed to the improved display by the AUD. Domestically, the RBA Minutes for the July Board meeting mentioned “a little more momentum than had earlier been indicated”, suggesting that Australia’s central bank would not be lowering the cash rate again anytime soon. Although something of a surprise, it is worth cautioning against over-reliance on this particular phrase in the Minutes. Since the meeting was held two weeks back, the prices of commodities most relevant to Australia have generally continued to decline and domestic data such as the latest jobs figures have mostly been on the weaker side. Interestingly, short-dated interest rate swaps imply that there is a greater-than-even chance that the RBA will reduce the cash rate by another 25bp when it meets again in early August. On the international front, the dollar has given back some ground in recent days in response to the continued decline in retail sales and the rising probability that the Fed will decide quite soon to implement QE3. The Fed meets again in two weeks time. In China, policy-makers have announced a huge increase in railway infrastructure-investment for the second half of this year. Over the next couple of days, we may yet see further policy announcements emerging from Beijing in the aftermath of the meeting of the Chinese cabinet designed to give the economy a much-needed boost. From a technical perspective, the Aussie has penetrated both the 100d moving average (at 1.0218) and the 200d moving average (at 1.0278). It will be a critical test over coming days to see whether the Aussie can sustain these levels or whether this recent break is just another false dawn.
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