General Commentary
Last Week’s Currency Trading Review:
The EUR/USD eased most of the week after the ECB announcement the week before. The pair is trading at 1.3537. When the European Central Bank announced its new policy measures last week, most of the commentary focused on the introduction of negative interest rates. From now on, commercial banks depositing funds with the ECB will have to pay a penalty for doing so. Admittedly, this is quite an unusual arrangement. However, it should have been a side story.
While the whole world talked about negative interest rates, the ECB managed to introduce some other policies without creating a big fuss. These other policies show what last week’s intervention was really all about. It had little to do with restoring the fabled monetary transmission mechanism, and everything to do with propping up European banks and governments.
The official story the ECB likes to propagate is, of course, a different one. It goes something like this: Despite already low interest rates, banks had not made enough credit available to businesses, particularly in eurozone periphery countries. At the same time, price level increases had been too far below the 2 per cent target.
he AUD/USD improved this week climbing over 94 but easing on Friday to close the week at 0.9388. Better Chinese data helped support the Aussie. Chinese activity measures slightly beat consensus expectations but not by enough to matter much in the context of random statistical noise. Retail sales were up 12.5% y/y in May from 11.9% in April, and industrial production came in at 8.8% compared to 8.7% previously. The bigger point may be that the activity measures are bottoming and in the context of modest increases to stimulus represented by some targeted spending measures, lowered reserve ratios for some banks, and liquidity injections by the PBoC.
The USD/JPY ended the week lower than its open after the conclusion of the Bank of Japan meeting and trader’s moves to safety as violence in Iraq expanded and traders moved to safe havens. The pair ended at 102.06. The BoJ refrained from changing its asset purchase program overnight, holding its monetary base target at JPY 270tn. Although markets have been rife with rumors that the BoJ might expand its QE program this year, it hasn’t so far.
The point is that Japanese CPI was lifted by two factors: a currency-inspired price rise and then a tax hike. Once both of these factors pass out of the Japanese inflation data, it will be curious to see whether the BoJ has achieved very much on the growth and inflation front.
