FX Market Overview

Yes it is December already. Are you feeling Christmassy yet? My kids have all called to say they have started to feel that way since seeing the coca cola “the holidays are coming” adverts. I can’t believe I brought them up to be so commercial.
Well November ended with a bang. UK public sector strikers had a lot of their thunder stolen and column inches too, by activities in the financial markets and particularly the actions of central banks. Yesterday was tootling along with little drama until an announcement at lunchtime that The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank were acting in unison (not the trade union) to push liquidity into the financial markets by lowering the cost of borrowing US Dollars through swap arrangements. Opinions vary but this did smack of the US Federal Reserve losing patience with the EU leaders who seem incapable of reaching agreement on a way forward. Many also believe the action was forced upon the central banks as a necessary to avert another Lehman Brothers style collapse of a major institution. There is no evidence that this is the case...yet but this was certainly less a case of the cavalry arriving just in time for the Eurozone than America doing what it does best in protecting its interests overseas.
Whatever the reasoning, the announcement had the effect of boosting shares, boosting the Euro and weakening the US Dollar. So the unwelcome side effect is that their actions have made it harder for Eurozone countries to export because their goods are more expensive. And that euro strength could be enhanced if the warnings from Italy’s new Prime Minister, Mario Monti proves to be true. He commented that the French and German leaders would have an important announcement to make regarding the Eurozone debt crisis within the next two days. So the clock is ticking on that.
China also took action to expand liquidity; cutting the reserve ration of its banks for the 1st time in 2 years. Whether they were acting in cahoots with the other central banks is not clear but Chinese data also showed a fall in manufacturing back to 2009 levels. This was perhaps more of an incentive to act for the Peoples Bank of China than anything happening in the Eurozone. That drop in industrial activity was a worrying sign for Australasia and a reflection of the lower demand in China’s export markets which obviously include Europe, America and the UK.

There was some data yesterday as well; US productivity rose and average wage levels fell slightly and the Canadian economy grew at a faster than forecast pace in the 3rd quarter of the year, That should keep Canadian interest rates on hold for the time being. None of this news was particularly influential though because investors, analysts and traders were trying to assess the impact of the central bankers’ surprise actions.
The Australian Dollar was weaker after poor housing data and a drop in consumer spending but was shored up by a flow of funds from investors who saw the unified central bank action as a positive for cross border investments.
The day ahead brings the release of the Bank of England’s optimistically titled Financial Stability Report. Instability is the status quo in financial markets at the moment so it will be interesting to see what the old lady of Threadneedle Street has to say about things. We will also get teh UK and US manufacturing sector business confidence reports. Businesses aren’t that confident so those ill also be interesting to see. But most traders are more concentrated on what Merkel and Sarkozy have to say in their “important announcement” and what the US jobs data will show us tomorrow.
In the meantime, the Pound is a tad stronger, the US Dollar a little weaker and the Euro is stronger. The Australasian dollars and the Canadian dollar are weaker after China’s data and the effect that has o the commodity markets and we all await the next moves.
While we wait, there are a few distractions; my favourite story at the moment is the one of two Indian farmers who allege their local tax officials are demanding bribes before releasing documents to them. The farmers took their revenge by unloading bags filled with around 40 snakes, some highly venomous, into the tax office. Mayhem ensued. You've got to admit, as protests go, it beats marching up and down with a poster. NB. No tax officials were injured in the making of this story.