In a time of massive Keynesian stimulus and with the heightened concerns over the direction of inflation, it is difficult not to note the relevance of Keynes’s famous statement “in the long run, we are all dead”. It is often taken to imply that such a major government stimulus has the greatest short run effect on real output and employment – not on prices.
At the peak of this global government stimulus (while we are living this short run) markets ask themselves whether governments and the Keynesian formula have succeeded in resuscitating the world economy, and whether a dreaded double-dip can be avoided.
Whether the Europeans’ rush to austerity or the US’s more gradual approach will prove to be better, is still to be seen – and even just contemplating the idea that governments might need more fiscal bullets to shoot down the possibility of a double dip is frightening.
Foreign exchange markets, in particular, continually mirror such shifts in investor sentiment. The euro’s move from lows of 1.1879 (against the US Dollar) early last June to reach a three-month high at 1.3334 earlier this month depicts these shifts in sentiment. Despite the mixed data coming out globally the general feeling is of a slowing economic growth. Speaking about the US economy, Alan Greenspan described a “quasi-recession”, saying that the US finds itself in the middle of a pause in a modest recovery.
Doubts on whether the euro’s highs were proper pushed its levels against the US Dollar lower, closer to the 1.2700 levels earlier this week. On Tuesday, however, the euro attempted higher grounds on the back of an improving eurozone ZEW economic sentiment even though the German Economic Sentiment indicator suffered a sharp drop.
Successful debt auctions in Ireland and Spain also helped lift investor sentiment. Ireland easily managed to raise €1.5 billion, attracting total bids of €5.1 billion. Spain managed to sell €5.51 billion of debt – satisfying its target €4.5-€5.5 billion. With the weaker European sovereigns managing to surpass funding problems, the single currency has enjoyed renewed support.
Weekly change, as at earlier this week, saw the Swiss Franc and Japanese Yen as net gainers against the US Dollar, as market fears boosted demand for the ‘safe haven’ currencies. Earlier this week the Yen was trading at 85.12 against the US Dollar while the Swiss Franc has traded closer to the 1.03 level.
For Japan, analysts said that the stronger Yen may in turn endanger an export-reliant Japanese recovery; especially in the light of the slowing Japanese economic growth registered for the period between April and June.
Prime Minister Kan and Bank Of Japan Governor Shirakawa have been reported as likely to meet during this week to discuss any possible responses to the strengthening of the Yen.
Japan’s government might have to consider further stimulus, which is expected to be relatively modest or simply a reallocation of funds – given Japan holds the highest debt to gross domestic product ratio among developed countries.
In the United Kingdom, Labour is accusing the government as “taking a huge gamble with the recovery” while embarking on the planned austerity measures. Chancellor George Osborne is expected to comment on concerns that inflation is rising faster than most people’s pay. Mr Osborne is expected to highlight that the issue is not about how much government spends, but how it will spend it.
Government reportedly plans to refocus public spending on areas that will boost the UK’s long-term economic recovery.
The British pound was down 0.28 per cent against the majors for the week as at earlier this week. CPI data, reported last Tuesday, showed that CPI inflation came in line with expectations, as CPI M/M was reported as -0.2 per cent and CPI Y/Y came out as 3.1 per cent. Analysts expect the British Pound to keep losing support, as the BoE will have to keep policy loose for quite some time to offset the consequences of its fiscal consolidation.
It was reported this week that China, in an effort to broaden the international role of the currency, has taken measures to allow yuan accumulated overseas to be channelled back to its interbank bond market.
The move aims at encouraging the use of the yuan in settling trades. Economists say that the scheme gives an incentive to foreign banks to receive yuan deposits, thereby helping to internationalise the RMB.
Despite the weaker greenback, the Canadian Dollar lost ground against the US Dollar last Monday, as weaker economic signals came out from Japan and the United States. Lower sales of existing homes in Canada also weighed on the currency.
Upcoming FX key events
Today: UK Retail Sales and US Philadelphia Fed Manufacturing Survey
Tomorrow: Canadian CPI.
FX Tech3 is neutral.
USD/JPY is neutral.GBP/USD is neutral.USD/CHF is neutral.
AUD/USD is bullish, target 94.00, key reversal point 87.00.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
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Mr Muscat is senior trader at RTFX Ltd.