6 Doses of Monetary Straight Talk
Renewed risk aversion sent the US dollar higher on Tuesday, and we heard a multitude of comments from key ECB and BoE policy officials, each of whom vowed to keep stimulus measures in place for now.
Like many other major currencies, the British pound (GBP) traded lower against the US dollar (USD) on Tuesday, but held steady against the euro (EUR). According to the British Bankers' Association, the number of loans for house purchases increased less than expected in the month of August. Loans are still up from the prior month, but lending was not as robust as economists had hoped.
While there was no other economic data released, we also heard from a number of Bank of England (BoE) policymakers including monetary policy committee (MPC) officials Ben Broadbent, David Miles, and Paul Tucker.
Broadbent felt that some market participants interpreted the central bank's forward guidance incorrectly, and that it was not a pledge to make no changes to interest rates for the next three years. If the unemployment rate falls more quickly than expected, Broadbent felt that it would be right for the BoE to consider tightening monetary policy.
While Miles stopped voting for more quantitative easing (QE) at the last meeting, he feels that the recovery is still vulnerable. Though surveys show that the UK economy has strengthened, it is not back to normal, and a sustained period of growth is still needed to reduce the slack. Miles felt that the UK does not need tighter monetary policy right now, and that the market's view on the unemployment rate is too optimistic. Tucker said that slack in the economy means that the central bank is in no rush to withdraw QE.
Based on these comments, UK policymakers recognize the recent improvements in economic data, but they do not feel confident that the trend will last, and therefore, they want to keep the level of stimulus intact for the time being.
2 Catalysts Weighing Down the Euro
For the third consecutive trading day, the euro weakened against the US dollar. The losses were small, but nonetheless represent hesitation in the market. This morning's German IFO report was bad enough to keep the euro from rallying, but also strong enough to keep it from falling sharply. Business confidence improved slightly in the month of September, albeit by less than economists had anticipated.
The IFO survey rose from 107.6 to 107.7 versus a forecast for a 108.0 reading. Businesses were less optimistic about current conditions, but more hopeful that activity will improve in the coming months. This data suggests that while the European Central Bank (ECB) is concerned about the Eurozone economic outlook, and certain economic reports have flashed signs of weakness, the momentum is still positive going into the fourth quarter.
We also heard from a number of ECB policymakers this morning. According to Ewald Nowotny, no additional liquidity is needed at the moment, but the ECB will discuss whether new LTROs are needed. He felt that it is important to show that the central bank has more instruments at its disposal, even if it is not necessary to utilize them at this time.
ECB member Vitor Costancio seems to agree. He also said the central bank has several policy instruments available, if needed, and mentioned that forward guidance is improving. Benoit Coeure did not talk about the possibility of additional LTROs, but said the central bank's expectations for a gradual recovery have been confirmed. Coeure nonetheless expects rates to remain low for an extended period of time and said there is no need to change forward guidance.
It is clear that Eurozone policymakers are comfortable with the current level of monetary policy, but they felt the need to remind the markets of their dovish stance, which will remain in place until there are consistent improvements in Eurozone data.
A Clear-Cut USD/JPY Range for This Week
The Japanese yen (JPY) traded higher against all major currencies on Tuesday, with NZDJPY experiencing the steepest losses. With no Japanese data released overnight, the selloff in the yen crosses is a reflection of the ongoing anxiety in the markets.
The Fed may have left asset purchases unchanged at the last policy meeting, but the central bank hasn't completely eliminated the idea of tapering this year. At the same time, the fiscal showdown in Washington is keeping stocks from rallying.
The Nikkei was unchanged overnight, and is taking its cues from the yen. Japanese markets were closed on Monday for a holiday, and after hitting two-month highs last week, the quiet session also encouraged profit taking. Since there's not much US economic data scheduled for release this week, either, USDJPY has been trading in a tight range, and one that we expect to hold for most of the week. The 100 level should represent the upper limit for the pair, while 97 should hold as downside support.
See also: Dollar Shrugs off a Tough Triple Threat
Most of the yen crosses are down only slightly, but the selloff in NZDUSD accounted for more than a 1% drop in the pair. The only Japanese data on the economic calendar tonight will be small business confidence, and we expect sentiment to continue to improve as Japan's recovery continues to play out.
By Kathy Lien of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.