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Yesterday’s remarks by Fed Chairman Bernanke have put paid to the recent hypothesis that the Fed might be reversing its commitment to an extended period of ultra-loose monetary policy any time soon. His suggestion that wages growth remains subdued because of the weak labour market scuppered speculation that the Fed might need to start raising rates as soon as 2014.

Although Bernanke acknowledged the better news on both the labour and housing market fronts, he reaffirmed that the Fed would stay cautious. The content and tone of his remarks is completely understandable, notwithstanding the recent suggestion from two regional Fed Presidents that policy officials in the US might need to revise the setting of monetary policy before too long.

Guest post by Forex Broker FxPro

At their last meeting on March 13th, policy-makers at the Fed slightly raised their forecasts for growth this year, although they observed that unemployment remained elevated and that there were still ‘significant downside risks’ to growth. Last week, the Fed Chairman told Congress that higher oil prices represented an additional headwind for growth. New York Fed President Dudley recently pointed out that roughly half of the improvement in the unemployment rate over the past six months was due to declining labour force-participation.

Dudley claimed that a rising proportion of Americans have left the labour force because they have become discouraged after a lengthy search for work. It remains to be seen whether this latest shift in expectations is premature.

Commentary

Bernanke’s dovishness gives the dollar the boot. Unsurprisingly, the dollar was on the back-foot after Bernanke’s comments. The euro, which fell below 1.32 in the morning session, was up at 1.3350 overnight, while cable is not that far away from the 1.60 level. High-beta currencies responded positively to Bernanke’s dovishness – for instance, the Aussie is now back above 1.05 after languishing near 1.04 for a time yesterday. Risk assets generally performed well, with the S&P 1.4% higher and the Nikkei up more than 2%. Interestingly, despite the buoyant mood in Asia overnight, the Shanghai Composite continues to struggle – indeed, it is down 0.2%. After endless attempts over recent weeks and months, the ASX 200 has finally closed above the 4,300 level.

Tough times in India. Evident over the course of the first quarter of 2012 is growing concern that China’s soft landing might be rather more turbulent than expected. Unsurprisingly, commodity-related investments have under-performed, with resource stocks losing favour and high-beta currencies like the Aussie under-performing. Attracting rather less attention is the deteriorating financial predicament of the world’s second-most populous economy, India. Since early February, the rupee has lost 6% against the dollar and is down at a ten-week low, although to put this into context it remains the strongest currency in Asia and has appreciated by more than 5% against the greenback so far this year. The Sensex, which a month ago was up nearly 20% for the year-to-date, has fallen back by 8%. A number of developments have unsettled both investors and traders. Finance Minister Mukherjee announced on March 16th that India’s fiscal deficit will be much worse than expected in the current financial year, at 5.9% of GDP vs. a target of 4.6%. Inflation in India remains high, not helped by the recent rise in the cost of energy and the weakness of the currency, with wholesale prices climbing 7% in February, up from 6.6% in the previous month. Stubbornly high inflation has been the scourge of policy-makers across Asia – the Bank of India has left the benchmark interest rate unchanged for the past five months, after lifting rates on thirteen separate occasions over the previous eighteen months. Also, importers have been raising their purchases of the dollar ahead of year-end. There is international concern over the size of the current account deficit in India, and economic growth has slowed to around 6% as both consumer spending and business investment have softened. Much like China, India has plenty to worry about.

Contrasting Germany. After the decline in Q4 GDP at the end of last year, there is a strong focus on whether this was a one-off wobble or the start of a more sustained slowdown of the German economy. Last week’s provisional PMI data suggested the latter, but yesterday’s Ifo data have thrown more uncertainty into the ring, coming in slightly firmer than expected. The same held true for the ZEW data earlier in the month. The positive news was the fifth consecutive monthly increase in the headline Ifo data, although the pace of gains slowed notably, rising only 0.1 from 109.7 in February to 109.8 (the Feb. numbers were revised a touch higher from the previous reading). This explains the very brief positive response seen on stocks and the euro, with the single currency subsequently weakening in the first half hour after the release. Germany naturally remains the linchpin of the eurozone economy and one of the key reasons why the single currency has remained so resilient in the face of the problems of the peripheral nations.  Employment is nearly 3% above the peak seen just before the onset of the global credit crisis back in 2008, whilst the unemployment rate is below the 7.0% level.   But Germany has played a very long game, managing to engage in a number of labour market reforms in the middle of the last decade, as well as keeping its labour costs at competitive levels, compared from competitors within the eurozone and beyond. This contrasts with the reforms being undertaken in many peripheral countries, implemented during a downturn and in a much shorter space of time.   For now, Germany should escape a technical recession, with the overall signs for the first quarter modestly positive, but beyond then it’s still going to be tough going for most of the year for the German economy given the softer outlook for most of its trading partners.