Risk aversion, interest rate holds and Interventions.
05/Aug/2011 • Currency Updates•
Yesterday saw the Bank of England hold interest rates again. Additionally there was no increase in the Bank’s Asset Purchase Program (Quantative Easing) which remains at £200bn.
A recent poll of economists saw a number predicting there will be no rate rise until 2013, although most expect the rate to rise to at least 1.5% by the end of 2012.
The BoE’s quarterly inflation report is scheduled for next Wednesday. Markets will be focused on the latest forecasts for inflation and growth to see if a further round of quantitative easing may be needed to revive a flagging economy.
Following the recent escalation of anxiety concerning the state of the Italian economy, the ECB talked down speculation for future rate hikes after holding the benchmark rate at 1.50%. ECB President Jean-Claude Trichet cited the ‘downside risk to growth may have intensified’, while warning that the risk to inflation remains to the upside. The balanced rhetoric saw interest rate expectations diminish with notably Credit Suisse now factoring in a 0% chance of a rate hike next month.
The dollar has advanced against other major currencies in a flight to US treasuries. The primary appeal of the US dollar is its liquidity. The advance came as stocks plunged with the Dow plummeting more than 500 points in its steepest one day drop since 2008. The S&P and the NASDAQ saw even steeper declines, falling 4.78% and 5.08% respectively. A host of factors contributed to today’s sell-off as investor’s jettisoned risk across assets classes on concerns regarding global growth prospects.
A positive non-farms figure this afternoon would see the greenback further capitalize on these gains, and provide stimulation following the recent poor US GDP figure.
Overnight, Japan’s Finance Ministry intervened further in the currency markets in a unilateral effort to stem the rapid rise of the yen, which threatens the nation’s export driven recovery. In addition, the Bank of Japan cited that it would expand its asset-purchase program to 15 trillion yen ($189 billion) from 10 trillion yen, confirming fears of on-going weakness. The move comes just one day after the Swiss National Bank cut its interest rate to ‘as close to zero as possible’ in order to curb the franc’s recent appreciation.