With corporate earnings stateside beating expectations and speculation growing that the Bank of Japan will engage in further stimulus after releasing disappointing trade numbers, equity markets are in the green across the world as traders embrace optimism. The disappointment in Japan’s export figures has been largely attributed to spill over from the weakness seen in the Chinese economy. With BoJ governor Kuroda indicating that more stimulus will not be forthcoming the market has taken a contrarian stance betting that sooner rather than later the BoJ’s hand will be forced into more accommodative monetary policy prior to the implementation of proposed tax increases in 2017. The market impact of this sentiment has been widespread with the Nikkei, ASX and NZX seeing gains while the corresponding impact on the currencies of Japan, Australia and New Zealand has been one of weakness against the USD.
Shifting focus to Europe, we see largely the same dynamic play out with traders betting that the continued weakness in inflation in the Eurozone will prompt the ECB to increase the size of their asset purchase program. This optimism has driven European equities higher, with the FTSE Eurofirst 300 seeing gains, while the effect on the common currency has been muted with it treading water against its British and American crosses. The news has not been uniformly good as the positivity surrounding the prospects of continued low interest rates has not yet translated into higher prices for commodities, negatively impacting the shares of resource stocks and likely contributed to weakness seen in aussie and kiwi dollars.
In continuation of today’s focus on central bank policy, the Bank of Canada is set to make their rate announcement later today as well as release commentary that will outline their expectations for the Canadian economy and central bank policy heading into the future. It is largely expected that bank governor Poloz will stay the course on monetary policy as this year’s two rate cuts has likely bought enough insurance to insulate the Canadian economy from the worst effects of the downturn in commodity pricing. With an economy in a technical recession and soft employment and inflation numbers it’s expected that the BoC will opt to stay the course. As of now the loonie is trading slightly weaker relative to the greenback with the BoC announcement later today likely to result in a spike in two way volatility in the pair it’s too early to tell if this trend will persist.
Further reading:
Commodity currency focus: AUD, NZD are falling – Is CAD next?
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