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The big show in town next week is the meeting of the ECB where it is expected to outline in more detail its plan for doing “whatever it takes” to support the eurozone. Ahead of that, the ECB head, Draghi, has written in a German newspaper (Die Zeit), standing firmly against German opposition to plans to buy more bonds in a more structured format, stating that in order to do its job it is required “to go beyond standard”¦tools”.

The impact such measures are likely to have on peripheral yields means that the result of next week’s meeting will be crucial for the single currency, determining whether the up-move seen on EUR/USD during August is likely to be sustained.

Guest post by Forex Broker FxPro

Commentary

The end of the road in Brazil.   No great surprise to see a further rate cut in Brazil overnight, the main benchmark rate being cut from 8.00% to 7.50%.   In global terms, this seems pretty high, but for Brazil, this is the lowest rate for many years.   But there were strong indications from the central bank that further rate cuts are unlikely for the time being.   The government has enacted a number of tax breaks in order to give the economy a boost and inflation is seen as a threat, in part because in contrast to China, Brazil has a poor record of investment and this has caused bottlenecks in certain areas of the economy.

The gold distraction.  As the US Republican National Convention takes place this week, one of the debates that has caught attention is the discussion about restoring the link between the dollar and gold. Indeed, if elected, the Republican Party has pledged to set up a “gold commission”.   The debate has given a new weapon to gold bulls who have been frustrated by the price action for most of the year to date. But the arguments look tenuous at best. The feeling is that Americans have somehow been cheated by the fall in the dollar, especially over the past decade. Furthermore, there’s an underlying belief that somehow bankers and central bankers can’t be trusted and have too much power. Therefore, faith should be placed in something tangible that can be trusted, i.e. gold.   But it’s a huge leap of faith to think that a return to some sort of linkage between the paper currency and gold could solve matters. The period of the gold standard was one of great instability, with countries often defending their currencies with policies that crippled their domestic economy. And whilst the dollar has been volatile since the early 70s, it’s only 20% lower over 40 years in nominal terms and the decline is smaller when you take into account differing inflation rates globally. As for the current price action, the talk has probably lifted gold from what were soft levels, not least when compared with the further recent rise in global gold holdings in ETFs (up over 4% through August) and also the continued move lower of global real interest rates (which normally lifts the price of gold). But beyond that, the debate is most likely to be a sideshow rather than something that gains serious traction and propels the price further north.

Divergence down under.   The recovery of the NZD vs. the Aussie seen earlier in the week was reversed overnight, in part helped by stronger business confidence data out of New Zealand. This showed the second consecutive monthly increase in the main business confidence indicator, coming at a time when activity is slowing in many other regions.   As for the Aussie, it remains beset by a number of factors, not least the collapse in prices for Australia’s two major exports, coal and iron ore. Since mid-April, the price for iron ore has plunged by nearly 37%, while coking coal prices have dropped by nearly a quarter. A sharp decline in Chinese demand for these two key commodities is the principal explanation. To reduce inventories, the large iron ore companies have become distressed sellers, which explains why prices have plummeted in recent weeks. Putting this into context, China accounts for more than a quarter of total Australian exports; iron ore accounts for nearly 60% of Australia’s exports to China. To make matters worse, this extraordinary demand for Australian iron ore from China over the past decade is not coming back any time soon. The construction cycle is well and truly on the slide in China, as is infrastructure demand.