Reserve Bank of Australia keeps interest rates on hold

The Reserve Bank of Australia in April’s meeting decided it was sensible to maintain interest rates on hold at 3%.Reserve Bank of Australia keeps interest rates on holdIn their report, the Bank noted that shortcoming in terms of worldwide growth seemed to be reduced with the US enjoying modest expansion.

Growth in China – Australia’s largest trading companion – was also seen to have calmed at a realistic pace with domestic growth close to trend over last year.

Following comparatively soft retail data being published in the first two months of the year, the RBA stated that reasonable growth in private consumption expenditure is taking place with house investments slowly improving.

In last month’s statement, the Reserve Bank stated that easing carried out through 2011 was yet to be effective, however pointers as of April were suggesting that the easing steps are having a positive influence on the Australian economy.

The rate hold was generally anticipated by markets, however the less dovish comments saw traders regain confidence in the commodity based currency causing it to rally against most of its major counterparts.

Some good news for the UK as we look to be avoiding the much publicised triple dip recession, according to the British Chamber of Commerce (BCC).

The view is based on a strong performance by Britain’s service industries throughout the first quarter of the year has kept the economy developing.

The weakness in Sterling has provided exports a lift, it said.

The survey also displayed advances in the manufacturing sector, although employment had deteriorated.

Sterling is trading higher this morning with Cable up at 1.5226 and GBPEUR approaching 1.19 at 1.1864.

Key events for Sterling this week will be the Bank of England Interest Rate and QE decisions on Thursday which are both expected to remain at 0.5% and £375 billion respectively.

Also expect further movement against the Greenback on Friday afternoon where we have the Non-Farm Payroll numbers for the month of March where 200,000 new jobs created are projected.

FED’s Ben Bernanke launches QE3

The money markets have extended their risk rally even further after Fed chairman Ben Bernanke has announced a third round of Quantitative Easing (QE) for the US economy. FED's Ben Bernanke launches QE3The move was almost certain; after last week’s non-farm payroll data indicated that the employment levels were very low and as markets turned negative on the recovery of the US economy.

Even though the QE3 announcement has pledged to buy an extra $40 billion worth of assets (mortgage backed securities) until the economy gets back into recovery, Bernanke still insists it may not be enough unless unemployment is driven to lower levels.

The main difference this time is that should it not be enough, they can increase the amount of purchases at any time.

Interest rates are set to be on hold till 2015 in the US and the price of gold soared post the announcement in tandem with the euro crossing the 1.30 mark – trading at its highest level since May 10.

With a weak dollar, post the QE announcement, the surge in the euro was also helped with some positive news from the euro zone as the ESM was ratified and given the go-ahead to aid the eurozone recovery.

Furthermore, not only will the ECB help Spain and Italy by buying bonds from the struggling economies, as they need immediate help, there is also a possibility that they would extend help to Portugal, Ireland and Greece.

The Greek PM has also reinstated that a third bailout package is not necessary, even though most investors continue to anticipate further aid for the troubled economy.

With so many events emanating from the US and Europe, Sterling has managed to ride on the back of euro strength to highs crossing the 1.62 mark, yet fall to two month lows against the Euro to 1.2420.

Surprising jump in UK house prices

This was the view of Nationwide for the month of August when UK house prices rose 1.3%. Surprising jump in UK house pricesThe move was the biggest since January 2010 and means the average house price stands at £164,729.

However, we should not get too carried away with the data according to their Chief economist Robert Gardner.

“Nevertheless, the fact that the annual pace of house price decline moderated to minus 0.7% in August from minus 2.6% the previous month provides evidence that conditions remain fairly stable”.

Over to Europe and Valencia is the latest region of Spain to request a larger than expected bailout than previously thought.

Their request has increased by €4.5 billion and comes alongside the Catalan region which has also asked for access to the €18 billion Madrid public fund.

A major driver of their debt has come from failed projects such as the Castellon Airport which has cost billions yet a single flight has never taken off.

This coupled with Spain’s disappointing growth figures which shrank by 0.4% in Q2 following a contracting of 0.3% in the first leaves the country struggling to find positives in their economy.

Consumer spending dropped 2.2 percent in the second quarter compared with the same period in 2011 as median pay fell by 3.9 percent on an annual basis.

Employment, measured in terms of positions equivalent to full-time work, plunged 4.6 percent over the 12 months that ended June 30, representing the loss of more than 800,000 jobs.

These numbers are hurting the overall Eurozone’s performance and will no doubt be contributing to reports in the press that ECB Governing Council member Ewald Nowotny will cut its growth forecasts next week.

There will not be an improvement, but rather a deterioration in expectations. We have to expect negative growth rates, contraction, in practically all the southern countries in 2012, and in France roughly stagnation.

Will the ECB act to save the euro?

The annual meeting of the world’s central bankers at Jackson Hole looms large on the horizon.Will the ECB act to save the euro?Two years ago FED Chairman Ben Bernanke used the symposium to launch QE2, and with the markets set to again be disappointed by the lack of announcement of another round of outright bond purchases.

Will the ECB step into the Fed’s void and announce a plan to cap bond yields in Spain and Italy?

The euro is trading up against the Dollar and Sterling after ECB executive board member Jorg Asmussen lent his support to the idea.

His opinion carries weight in the markets because of his close relationship with Angela Merkel, and it is German opposition to bond buying by the ECB that is the main reason peripheral bond buying has not already happened on a large scale.

But it still remains unclear whether the ECB will actually act.

Capping bond yields would require an open ended commitment by Mario Draghi which looks unlikely considering when the bank undertook both LTRO’s it was capped at a certain amount of the balance sheet.

Any move by the ECB would also need to be accompanied by further conditionality by the periphery, probably further austerity measures.

Both will take time to agree, which may make next month’s meeting slightly early for the ECB to act.

UK government borrowing figures were worse than expected yesterday, disappointing the market and ratcheted up the pressure of the Chancellor George Osborne to move towards policies aimed at growth.

The UK consumer continues to deleverage, firms are still hoarding cash and foreigners, especially Asian, remain heavy savers.

As long as all three above remain net savers the government will need to borrow, so it is vital the government promotes policies aimed at reducing private sector net saving, like the funding for lending scheme.

Eurozone growth continues to fall

The eurozone’s economy contracted in the second quarter, figures showed yesterday. Eurozone growth continues to fallGermany registered positive GDP but it was a grim picture across the rest of Europe and the disparity between Germany and other European countries which is at the heart of the crisis, continues to grow wider.

The data saw stock markets rise in anticipation of further stimulus by the ECB in the coming months, with a rate cut expected by the end of the year and the bank expected to finally begin an official QE program.

The euro was broadly unchanged after the news and is still trading this morning if tight ranges against the Dollar and Sterling.

Today’s Bank of England minutes are important because the market will be looking for signs of when further stimulus may on the cards.

After the Bank announces further QE, they have tended to wait several months before committing to more stimulus.

If QE fails to work as well as expected, the BoE will need to try more unconventional measures to kick start the UK economy which are likely to be announced first via the minutes.

Wise money markets continue their rollercoaster ride

Last week we saw a huge swing in the wise money markets and in particular a bounce in favour of the euro.Wise money markets continue thier rollercoaster rideThe move was sparked by better than expected US jobs data and also behind the scenes preparation for bond buying leverage from the ESFS.

This pushed the euro higher against the US Dollar by over 2 cents on the day and this was mirrored by a move into risk appetite with commodities and equities surging higher with expectations that the ECB are ready to act.

As we opened trading this week attention was focused on whether we would sustain this optimism and for now the answer is yes.

Yesterday EUR/USD maintained its weekly highs at 1.24 despite Italian prime minister Mario Monti warning that the eurozone may fall apart due to disagreement among European members.

We feel that today we could see some selling pressure coming back into play on the euro after a solid squeeze higher.

Another main factor supporting the boost into optimism has been the fact that Spanish and Italian yields have fallen and continued to fall yesterday.

The markets will be monitoring the pressure on Spanish and Italian bond yields very closely over the coming days and also for any indication that either sovereign may actively seek help from the bailout pot.

Yesterday the Reserve Bank of Australia kept its interest rate steady and this helped boost the Australian Dollar further.

Interestingly in the statement they did reference that the strength of the AUSD is higher than underlying fundamentals- a point not previously noted.

Mario Draghi’s turn to disappoint the wise money markets

As the wise money markets continue to digest the ECB rate decision and subsequent meeting yesterday we have seen the retracement of GBP/EUR and the strength of the world safe haven currency, the US Dollar. Mario Draghi's turn to disappoint the wise money marketsECB President, Mario Draghi, announced a rather bearish statement focusing on the fundamentals of the system on the long term rather then providing the immediate ‘bazooka’ that investors were expecting after last weeks announcement.

Mr Draghi strongly hinted that the Securities Markets Programme or bond buying scheme would likely continue on the requirement that European governments approach the current bailout fund, the EFSF, for an official request for aid which in turn will allow the ECB to continue the bond buying scheme.

This may be because of pressure and apprehension from the superpower Bundesbank.

Mariano Rajoy and Mario Monti also met yesterday to discuss the problems they are respectively facing in the markets and their debt problems with both nation struggling it was thought they could ask for a formal bailout from the ECB or EFSF/ESM with Spain calling a government meeting today in what could be the first country to ask for the bailout funds to step in as their bond yields have surged over 7.345%.

The BoE interest rate decision did not pull any surprise comments with the interest rate being kept on hold much as anticipated.

Although, there was talk of a interest rate cut it was quickly quelled as the MPC thought it may hinder UK banks ability to lend.

It is clearly apparent the bank needs to come up with a definitive plan to combat the slowing economy with the strong contraction seen in construction figures being one of a number of alarming figures of late.

On the ECB announcement the markets shook with volatility with EUR/USD hitting the weekly high of 1.2402 before falling sharply to 1.2172 with the utter disappointment from the lack of a definitive plan from the ECB president.

We also saw large swings in GBP/USD with it rising over a cent on the day to a high of 1.5678 from a low of 1.5522.

After the euro initially strengthened it weakened back to the highs of GBP/EUR for the day of 1.2765 from the lows of 1.2638. Spanish bond yields have shot up from 6.60% to 7.16% and Italian Bond yields also shot up from 5.75% before he spoke to 6.33% after he spoke.

We saw sharp falls in the major stock markets across Europe reversing earlier gains with the FTSE, DAX and CAC all finishing in the negative with Wall Street and Asian trade following the same pattern after the disappointment of the days events.

FED leads the Central Banks news

Later today the FOMC will kick start the hat trick of central bank meetings with the Bank Of England and the ECB tomorrow. FED leads the Central Banks newsThe ECB is going to be the main event although all three central bank meetings could potential produce surprises.

Firstly looking at the Fed meeting it is not expected that FOMC will embark on another round of QE despite the fact that US data of late has been weaker than expected.

There is no briefing following the meeting so it is unlikely that we will see too much volatility on the back of tonight’s meeting and therefore September has been earmarked for another round of QE, however there is a possibility that the Fed could act which will keep the market on its toes.

It is a similar story from the Bank Of England with no change expected.

There have been calls for a rate cut from the Bank Of England, however this is probably unlikely as it could do more harm than good if it further discourages savers from keeping funds in bank accounts and reduces lending capability further.

What we may see is a move towards further QE in the autumn from the Bank Of England to counter the extremely grim economic data of late.

The Pound has dipped ahead of the meeting due to the marginal room for more loosening and the uncertainty ahead of the meeting.

Finally the ECB will be most interesting as the market is expecting some positive action by the ECB in fighting the euro crisis.

Recently the ECB have stepped up their language by confirming they will do everything possible to protect the euro and thus expectations have been lifted for this meeting.

The euro has managed to squeeze higher in the last week against the pound and the USD as more support from the ECB has permeated.

Wise money markets wary of Greek election

The wise money markets continued their choppy trade but in tight ranges as focus naturally turned towards this weekends Greek election. Wise money markets wary of Greek electionThe outcome of the election could catalyse a messy Greek exit if anti austerity parties are victorious and the result looks too close to call.

The euro remains volatile but in a tight trading range as investors fretted about speculating on such an uncertain outcome.

Concern for Europe escalated however as Spanish bond yields hit their highest level in a sharp move that surprised the markets, in addition the yields for Italy also surged higher.

The move in the credit markets was not mirrored in equities which will be a relief, however the spike higher in yields demonstrates that much more needs to be done to shore up Europe and suggests that the recent Spanish bailout was piecemeal.

George Osborne yesterday added his pennysworth to the European crisis by stating that a Greek exit from the eurozone could be the price that is required to lead to Germany stepping in to save the euro.

The chancellor’s comments from the sidelines are likely to inflame European tensions ahead of the Greek elections, he also went on to criticize last week’s decision to recapitalize Spanish banks via the government rather than directly to the banks and the markets suggest he is correct in this assessment with rising Spanish yields reflecting this.

So as we move towards the weekend we can expect further volatility in the euro and US Dollar but nothing of significance until further clarity is gleaned.

In the markets yesterday and overnight the Japanese Yen and the Australian Dollar were the main movers.

A report by the IMF suggested that the Yen was overvalued and that the Bank of Japan should take more action to weaken the Yen leading to a fall in the Yen against most major currencies.

The Australian Dollar gained as the markets flushed out short positions in the Australian Dollar following data from the markets that highlighted record short positions in the AUD.

Greenback remains above the european mayhem

The Greenback has seen an unvarying rally since the end of April, taking advantage from continuous mayhem in the eurozone and the increase in US Treasury yields. Greenback remains above the european mayhemInvestors have attempted to steer clear of the US economic and political worries as Europe remains centre stage.

Furthermore the Dollar successfully shrugged off a softer April retail sales report and a somewhat more vigilant set of FOMC minutes.

A revival in April durable goods orders, new homes sales and a relatively stable reading for Michigan confidence must bode well for the Greenback’s current route and should remain unhindered.

As the probability for further uncertainty in advance of Greek elections next month, risk aversion and the Dollar are set to remain high.

As you would expect from seeing the weekend papers, it’s all about Greece and the political manoeuvrings ahead of second round voting in mid June.

The single eEuropean currency shows no sign of fight back ahead of these elections.

In the meantime, there is growing pressure on German Chancellor Merkel to agree to measures that were formerly prohibited at an informal EU summit last week.

Such methods consist of direct recapitalisation of banks and/or unrestricted buying of peripheral country debt by the ECB and through the Eurozone rescue fund.

Finally over to the UK where CPI figures will take centre stage Tuesday morning where we are expected to see further declines in the annual figure from 3.5% last month to 3.1%.

The next day we have Bank of England Minutes followed by UK GDP on Thursday will ensure a busy week for Sterling in the middle part of this week.