Discussion and Analysis by Charles Porter:
Whilst markets in the United States observe Labour Day, global markets have a quiet start to the week with a deficit of anticipated, notable and market-orientated announcements. However, as tensions continue to escalate amongst the Korean Peninsula, inducing a global spill over, the week may have more in store than it first appears.
Possibly the most notable event of the week will be Thursday’s meeting of the Governing Council of the ECB on Thursday. This event will be key for major currency pairs because the meaning and implication of ‘no news’, or no change, is remarkable. Whilst inflation, proxied recently by CPI data releases, is not threatening the target, the deflationary threat, which demanded such low interest rates and an active Quantitative Easing program, has abated. Therefore, it is uncertain when the process of tapering, or pre-empting the curtailment of the bond-purchasing program, will commence.
In contrast to his ECB colleagues, Mario Draghi, at Jackson Hole and Lindau recently, has evaded an acknowledgement of the Euro’s remarkable year-to-date appreciation vis-à-vis the dollar. Whilst the absolute value of the Euro is unremarkable and certainly not breaking any records, the rate of change for a major currency is concerning. The impact that a strong Euro has upon the competitiveness of Eurozone exports should be watched closely due to the ability to influence the macroeconomic recovery. Despite the threat that a trade-weighted Euro appreciation could have upon recovery, it is important to consider that the currency’s appreciation is in part generated by the return of structural investment stemming from the grip of recovery.
Next week, the Bank of England will make a similar decision regarding monetary policy guided by an above-target inflation rate. Inflation within the UK is blamed in part upon the significant depreciation of the pound which in turn has been driven by the evasion of downside risk and uncertainty. The effect of currency depreciation, in combination with a significant marginal propensity to import, has fuelled inflation by increasing the price of foreign goods consumed domestically. The following week will also see the Federal Reserve re-evaluate US monetary policy.
Elsewhere, the Swiss Franc and Australian and Canadian Dollars all await news that could introduce weekly volatility into their currencies. The Dollar currencies will both see interest rate decisions later this week with the Australian decision due tomorrow followed by the Canadian decision on Wednesday. Australian and Canadian statistics releases, concerning GDP and unemployment respectively, will also qualify these rate decisions. Australia’s cash rate target has remained unchanged for a little over one year at 1.5%. In contrast, the Canadian policy rate was last changed in July this year and therefore stability may be anticipated. Finally, the Swiss Franc will be closely watched tomorrow as annualised GDP (and GDP growth rate) statistics are released.