After Chinese data showed that the worlds second largest economy had grown 6.8% year on year, risk aversion in the markets calmed significantly. As we wrote that we expected yesterday, the JPY weakened as a result while the NZD and AUD rallied. Expect the NZD to fall tomorrow when weak inflation will bring up the sentiment that the RBNZ may need to make further rate cuts from its already record low rates.
The sterling had earlier rallied following better than expected inflation data, the cable reaching 1.4340 (now 1.4218) and GBPJPY reaching 169.10 (now 167.65) and GBPCHF reaching 1.4444 (now 1.4262) before Mark Carney made some comments and put an end to the rally by saying he would never condone an increase in rates until the unemployment, wages and inflation were at much higher levels and until concerns with global markets were far better. This strikes me as very strange, although one would think I would be used to contradiction from the BOE by now.
Don’t get me wrong, all of you who have been reading my comments since the middle of last year will know that I am one of the biggest advocates of listening to the central bank. I believe that they can tell us much more about their intentions than by simple reading a bunch of guesses from analysts. However, what shocks me about Carney is that this is the man who said the “time for an increase in rates is fast approaching in August when:
1.) Inflation showed no growth compared to the small growth it now shows.
2.) Global markets were doing far more poorly. (The BOE specifically said at the time that they were not concerned about this!)
3.) Unemployment was higher than it is now.
So if he advocated normalization of monetary policy back then, why has he changed his mind now when all of these conditions have improved? Was he just jealous that the FED was getting all the attention and trying to make some noise and grab headlines for himself? I really cannot begin to understand how the Governor of one of the most important central banks in the world can lack so much consistency. It completely baffles me.
Regardless of this, this week, we are faring better than we were last week (we were faring a further 550 pips better before Carney’s contradiction). With the data from China, the only major deterrent for risk appetite we have at the moment is oil prices and how low they can fall. I take comfort in the fact that of knowing that we are near the bottom and a turn around period can not be too far away. In the mean time:
Tomorrow we expect employment data from the UK and earnings data. Regardless of if it is good it will not make much difference since:
1.) It will probably find its way onto the market early.
2.) Carney’s comments are all that the market will consider until the Sterling hits 1.40 or lower. Regardless of the fact that the UK economy is showing improvement and is the second best performing among the G10 nations, markets will now be even more uneasy knowing that the BOE changes its position on monetary policy like a child changing the channel on a Tv.
I really hate days like this. Even when you predict things right and make progress, something comes along and sets you back to even before the starting line.