US data still support case for QE2
International Trading
Market Outlook
THE TECHNIQUE OF GIVING A GOOD MASSAGE
14 years ago
Monday, October 11, 2010
, Posted by Usman Ali Minhas at 7:49 AM
=> US data still support case for QE2
=> G7 meeting unlikely to change underlying story of USD weakness
The G7 meeting at the weekend will be the main focus for FX markets coming into the week, given all the talk of “currency wars”, the recent BoJ intervention and the comments from Juncker complaining about EUR strength. But it is very hard to see the G7 producing a communique that significantly opposes further USD weakness against the majors, much less coming up with co-ordinated policy steps to target exchange rates as in the Plaza and Louvre Accords of the 1980s.
The comments in the IMF’s latest world economic outlook should make it clear that there can be no agreement that the dollar is even undervalued. The IMF note that the dollar is still, by their measures, still on the strong side of medium term fundamentals, while the euro and the yen are broadly fair. This may not fully take into account the weakness of the dollar seen over the last month, but nevertheless indicates that the US is very unlikely to see current levels as a reason for opposing USD weakness, especially since the Fed sees US inflation as still lower than is desirable. The most the G7 are likely to agree on is the timeworn statement that “Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and co-operate as appropriate”. This is standard, and essentially allows the market to move as it wishes, provided the moves are not too fast. The BoJ may yet make some more incursions into the market, but comments last week made it clear that these are smoothing operations rather than representing a line in the sand. The only clear FX recommendation that the G7 are likely to be prepared to make is that China allows its currency to continue to appreciate, but that is an issue that China will decide on.
As far as events are concerned this week, the market will be interested in the latest FOMC minutes (from the Sep 21 meeting) on Tuesday, but the recent Fed statements make it clear that QE2 is very much on the table, and it is unlikely that the minutes can add much to that at this stage. The market will consequently be interested in the US data, following last week’s slightly disappointing employment report and Bullard’s comments indicating some improvement in the US data of late. Most of the data is on Friday, and the Fed focus on low inflation in the latest statement suggests a focus on CPI.
In the UK, the labour market data may be the most relevant in terms of the QE debate, though the activity data has been generally soft. Sterling may hold up better against the EUR because Euro-zone opposition to USD weakness makes sterling an easier vehicle, but the underlying risk of QE2, relatively low UK short yields and weak UK growth prospects make a major sterling recovery look unlikely.
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