Forward Guidance Day in Europe, Independence Day in the

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Good Morning to those of you at the office today or reading this from your Blackberry, markets took on a ‘wait and see’ approaching overnight trading. Investors appear to be holding their collective breath during today’s US Independence Day holiday and ahead of Friday’s key American employment statistics. As the holiday American session warms up, currencies are generally where they closed yesterday, with the exception of the Euro and the Sterling which are both softer following their respective central bank statements today.

The big news in the last 24 hours has been the military coup in Egypt. The uncertainty has pushed oil prices up with Brent and WTI trading in the $105 & $101 handles respectively. The Egypt nervousness has tilted activity towards safe heaven currencies, though gains have been muted as investors are hesitant to take on much in the way of new positions on a US holiday the day before a major data announcement (US non-farms employment numbers).

The Asian markets were mixed as non-Japan stocks gained, led by the Hang Seng which grew 1.60%. The move came on the back of optimism about a US recovery via encouraging jobs data yesterday, which boosted the outlook for exporters. Japanese equities sat last night’s move out, investors seemingly hesitant to act ahead of the Friday’s US data. Both the Nikkei and Topix posted mild losses as the trading day was characterized by lower volumes.

Turning to Europe, both the BoE and ECB made had their regularly scheduled policy decisions today and as expected opted to leave overnight rates unchanged at 0.5%. In the aftermath, both the Euro and the Sterling have retreated against their major trading partners following dovish comments. Excess volatility that sometimes occurs when major data coincides with lighter holiday volumes has thus far failed to materialize however.

Looking to the BoE action today freshly minted governor Mark Carney was quick to adopt forward guidance, a favorite policy tool of his, as a means to contain market volatility. He signaled that the BoE will continue to maintain historically low interest rates longer than previously expected, noting that the economy is not yet self-sufficient and that recent increases in yields (due to Fed Tapering speculation) weigh on the outlook. These comments precipitated the Sterling declines and also caused yields in British government debt (Gilts) to contract. The FTSE however is well into positive territory on the day, up over 2% at the time of writing. The BoE comments give confidence to equity investors that easy access to capital will remain in place.

The Euro has also been heavy following the ECB’s rate statement as comments from ECB chief Mario Draghi that rates are expected to remain at “present or lower levels for an extended period of time”—Read: negative interest rates still possible. Draghi also confirmed that adopting forward guidance was deliberated.

No data today in North America, however tomorrow will be very busy: Employment statistics for the USA and Canada, plus the Canadian Ivey PMI. Markets will have their hands full.

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About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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