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Austerity And Policy Loosening The Order Of The Day

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Austerity and policy Loosening the Order of the Day

Market Highlights:

• QE over priced?

• Where will the axe land?

• Return to status quo

• QE over priced?

Ben Bernanke spoke at the Federal Reserve Bank Conference on Friday in Boston. Traders had expected the central bank chairman to shed more light on the size and timing of the expected stimulus pump. Conversely, Mr. Bernanke revealed little to firm up the predictions of QE that is now all but priced into markets. This sparked a small dollar rally during Friday afternoons trading. The dollar index, a trade weighted index that positions the USD vs. a basket of six major currencies, moved off of year lows and GBPUSD moved back below the psychological 1.6000 level. This came as a minor respite for the US currency in a week that had been negative, negative, negative. Asian currencies broadly gained after Singapore tightened its monetary policy by increasing the trading band its currency can move against the USD. The Japanese yen reached new 15 year highs, the South Korean won made head winds as did the Malaysian Ringgit and the Chinese renminbi. The Australian dollar hit parity against the USD for the first time in a move that is unnerving Australia’s exporters as their goods become less attractive overseas. Central banks are continuing the diversification of their currency reserves and the euro and Asian currencies are winning favour over the traditional USD. The expected loosening by the Fed on the 3rd November to get liquidity into the system and to boost recovery is fuelling the carry trade, the thought of lots of cheap dollars for an extended period of time only increases the short positions. The Federal Reserve traditionally have a relaxed policy on price stability and do not, as such, have an inflation target. With recent figures threatening deflation, the FOMC are now closer than ever on implementing a target. The target is likely to be closely aligned with the BoE and ECB policies of around 2% year on year. This target will further justify a hefty injection of liquidity to fight unemployment and price deflation. A relatively quiet week from America will keep its dollar trading on QE2 expectations.

• Where will the axe land?

This weeks spending review will pave the way for the UK’s coalition governments fiscal policy through 2011 and 2012. On June 22nd the emergency budget revealed £6bn of cuts, this Wednesday, they are expected to reveal £83bn of cuts. Markets and businesses are nervously poised to see where the treasury axe will land and if they will be spared. The PR exercise that preceded the June announcement proved to be well positioned and managed expectations well. If the same is true for this weeks Comprehensive Spending Review (CSR), we could see sterling relatively unscathed by Thursday. The housing market is just one victim of the expected spending cuts and tax rises. 40% of RICS members are reporting a increase of sellers coupled with a decrease of buyers, who would want to take a leap of faith and upgrade their family home? Certainly not anybody on the public sector payroll. On the 26th October the UK Q3 preliminary GDP figure will be published, this will be pivotal in the decision from the MPC to loosen their policy further by increasing their bond purchases. Most market participants do not expect UK QE2 to launch before 2011. Bank of England minutes will be revealed on Wednesday with Retail Sales on Thursday, however it is the CSR that will take centre stage this week.

• Return to status quo

The spotlight has been taken away from the eurozone over the last few weeks, much to the delight of Jean-Claude Trichet. Let’s look through history to around 12 months ago before the sovereign debt crisis rocked the single currency. EURUSD in October 2009 sat around the 1.5000 with GBPEUR at 1.0900. As the new-year turned and real fears of a eurozone default grew we saw lows of 1.1875 on EURUSD and highs of 1.2395 GBPEUR. I have always commented that the euro has a veil of secrecy layered over it that insulates the currency from the normal woes of a currency. The complexity of the model is a likely contributor of this veil, yet even the surest of hiding places cannot protect an entity from the seeping gas of a default threat. This threat has abated somewhat. The ECB, IMF and EU have written an insurance policy for Greece, Spain and Portugal to name but a few. As such, the euro is gaining ground rapidly and investors and central banks alike are stocking up on items with a € price tag. We could see a full circle and be heading to the levels we were at 12 months ago. German business confidence figures will be revealed this week, expected to be negative. However, the euro is not moving on fundamentals. Look out for those bond sales.

By Keith Miller, Senior FX Dealer - Custom House, a Western Union Company

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  • 429 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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