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FX Day Trading - 22 July 2010
MPC discussed quantitative easing
But one member again voted for higher rates
UK retail sales today
It was an uncomfortable day for the leaders of the coalition government. The prime minister revealed his youth live on television when, speaking of the war against Hitler, he erroneously described Britain as the 'junior partner' in 1940 when he should have said France. The deputy prime minister displayed his immaturity in the house during PMQs when he laid the country open to all sorts of litigation by erroneously describing the invasion of Iraq as 'illegal'. Who could think such a thing?
At London's opening on Wednesday the pound revealed its vulnerability when it plunged by more than a cent as a result of what Reuters described, pompously, as an 'erroneous trade'.
Simply, some clot trying to sell the Pound/Dollar rate pressed the [000] button instead of the [0] button. Sterling rattled around for a couple of minutes until said clot unwound his trade at a loss and emptied the contents of his desk into the bin-liner thoughtfully provided by the HR department.
An hour and a half later, when the Monetary Policy Committee minutes came out, sterling was a little higher than it had begun the day but it was about to have its cage rattled once more. The minutes concluded positively enough, with Andrew Sentance voting for an increase in the Bank Rate, but the middle bit sowed confusion in the minds of investors.
In paragraph 31 'The Committee considered arguments in favour of a modest easing in the stance of monetary policy... A further modest monetary stimulus would act to offset the softening in demand prospects and make it more likely that the inflation target would be met in the medium term.' The proposal did not make it as far as a vote but the MPC now clearly has at least three points of view to balance; tightening, steadiness and easing. It was not exactly what sterling needed to hear. The pound headed south and opens this morning lower against most currencies.
The US dollar had to contend with problems of its own when its chief custodian, Federal Reserve Chairman Ben Bernanke, gave his Humphrey-Hawkins‡ testimony to congress. The bit that got the market going was his comment that 'We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability.' He was talking about quantitative easing.
Although Mr Bernanke, like the MPC, went nowhere near pledging to print more money, investors were worried enough by the idea that he was even contemplating the notion. With the euro already out of favour the dollar had to lose ground to something on news like that so it lost it to the yen. Also see Dollar/Yen Spreads.
The euro's problem came with an unsuccessful government bond auction. No, it was not the dodgy southern stuff that investors spurned, it was 30-year German 'bunds'. Berlin had wanted to sell €4 billion but received bids for only €3.8 billion and even some of them were too low to be sensible. The Bundesbank was left with €0.8 billion unsold, which it bravely said it would hold onto 'for market-tendering purposes'. The stuff they did manage to shift carried a yield of 3.33% and the market's lack of appetite will have had a lot to do with the 3.25% coupon, a record low for German government long bonds.
After yesterday's ecostat famine today's feast includes something for every taste. Provisional purchasing managers' indices from Germany, France and the euro zone are accompanied by industrial orders for Euroland as a whole. Canadian retail sales coincide with the weekly US jobless numbers. Half an hour later the EU releases its consumer confidence index (probably unchanged at -17) and the US National Association of Realtors releases the figure for existing home sales in June (it could be up to 10% lower).
The UK figure to watch this morning will be June's retail sales. Analysts are predicting a 0.5% monthly increase but they have a poor record of accuracy with this statistic.
Lurking behind everything will be the spectre of tomorrow's EU bank 'stress test' results and the provisional figure for second quarter UK gross domestic product. Any trend that emerges today is likely to be transitory.
‡ The Humphrey-Hawkins Full Employment Act of 1946 obliges the Fed chairman to outline, twice a year, its monetary policy and how that policy relates to the presidential economic policy.
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'FX Day Trading 22 Jul 2010', Article by Moneycorp, last update: 22-Jul-10
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