Market Highlights
- Is the end in sight for quantitative easing?
- Carry trade concerns keep dollar suppressed
- All eyes on German fundamentals for Euro growth
Is the end in sight for quantitative easing?
As the markets rested yesterday, our countries leader continued in his seemly favourite past time of the moment; the slow demise of his reputation. Prime Minister Brown retreated from his proposal for a financial transaction tax, or ‘Tobin Tax’ after strong criticism from the U.S., ECB, Canada, Russia and the IMF. Brown floated the idea for the G20 finance ministers and central bankers meeting this weekend in St Andrews, but the proposal was quickly shouted down.
In the wider picture the meeting did seem to carry waves of optimism in to Asian trading this morning with risk appetite in the ascendancy following. As a result cable has passed the 1.6750 mark, a level not seen since the start of August and looks to be well supported for the moment.
With the aftermath of Thursday’s BoE policy there seems to be a growing consensus that we are reaching the end for quantitative easing after the Bank extended the program by £25 billion. The noises from the BoE following a similar vein to other policy makers globally and this may have helped the sterling tone after the market got caught short over the decision. A quiet day on UK fundamental data today will leave focus squarely on Wednesdays inflation report and words from the BoE Governor Mervyn King, where he is likely to shed further light as to the reasons of the QE increase and whether or not the rumors of the end are justified.
Carry trade concerns keep dollar suppressed
Across the Atlantic news from the Washington based IMF said that pressure from carry trades has moved the dollar “closer to medium-run equilibrium, but it is still on the strong side”. This gave the green light to more dollar selling and has seen the greenback fall against a wide basket of currencies except the Japanese Yen.
With gold fast becoming the new alternative investment of choice to the dollar, this could mark the potential tipping point for investor psychology in the future and safe haven buying. With the world looking outside of the worlds largest economy for hope, Moody’s changed its China outlook to positive from stable, citing the government’s success in steering the nation through the global financial crisis. The rating action affects the government’s A1 foreign and local currency bond ratings. Moody’s said that the country’s very strong international investment position has insulated it from the global financial crisis and reduced to a negligible level the risk that China could pose for a future balance of payments crisis. It will be interesting to see how the Yuan’s weakness due to being pegged to the slipping U.S. dollar will affect the trade relations between the two economic super powers.
This week investors will be watching to see if the Unemployment claims due for release on Thursday will come out on a par with last month at 512k as expected, but with the country reporting figures of over 10% of its population being unemployed, it could perhaps be overly optimistic.
All eyes on German fundamentals for Euro growth
The Eurozone this morning has seen Germany posting a trade surplus of €9.9 billion in September, down from €10.6 billion in the previous month. The breakdown showed exports up 3.8% m/m, while imports rose 5.8% m/m. Still, the three months accumulated trade is improving and data points to a positive contribution from net exports to overall GDP growth in Q3. The stronger euro doesn’t seem to have dented export demand, which seems to be stabilising judging by orders data.
It will again be Germany that the multination economy will turn to for its economic sentiment on Tuesday and its preliminary GDP figures due out on Friday.
By Lee Yoong, FX Dealer
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