Currencies manage to create a degree of interest

The US Dollar fell to a one-year low against the euro and weakened versus the yen on speculation that the global economic recovery is gathering strength and abetted by the view that the Federal Reserve will confirm this evening that US interest rates will remain at their current extraordinarily low levels for some time to come. These factors are having the ongoing effect of encouraging investors to buy higher-yielding assets and currencies and data showing that the New Zealand economy had emerged from recession only encouraged the shift towards risk. The Kiwi Finance Minister Bill English said that although their economy is stabilising, there is still a lot of work to do. The market however preferred to concentrate on the numbers – 2nd qtr GDP was reported to show growth of 0.1% q/q against the expectation of a 0.2% contraction. The NZ$ jumped on the news, up to another 14-month high (0.7315 v the US$ against 0.7190 prior to the data), dragging the Aussie with it.

Data yesterday was indeed sparse with just the July FHFA house price index to take into account and although this was a touch weaker than had been hoped, the difference wasn’t enough to cause concern. Equity markets closed firmer amidst expectation that although several G20 members this weekend, are likely to express some disquiet over the ongoing weakening of the USD and the continued reluctance of the Chinese to allow their currency to strengthen, nothing of substance will emerge that will make a half-penny of difference. The Head of the IMF, Mr Strauss-Kahn underlined the wide held view on the Yuan by expressing that he felt the currency was under-valued. He also stated that in the changes to the IMF voting rules, scheduled to happen in 2011, it will be China that will get the biggest increase and even though Presidents Obama and Hu did not discuss the issue of the Dollar’s role as the global reserve currency at their recent meeting, it doesn’t take a genius to see which way things are heading.

Today, the outcome of the FOMC meeting will be the highlight – not for the actual decision on rates but more for an insight on how and when the Fed will choose to wind down its purchases of agency and MBS debt. We did however have a couple of interesting bits from the UK this morning to keep us going. The BoE Governor, Mervyn King is scheduled to be involved in a breakfast seminar first thing (no headlines from that one as yet) and the MPC are due to release the minutes from this month’s meeting. Expectations here are also on the low side although it will be interesting to see who sided with who on the question of additional QE stimulus measures. As it turns out, the Governor and BoE member, Miles, both argued for an increase but in the end went with the majority to leave things as was. Sterling benefited from a bit of a boost on the information release.

Now we wait for the interest rate decision from the Norges Bank at 13.00 today. While there is a risk of a 25bp hike given Norway’s improving growth and a stronger than expected labour market, weighing against it is a stronger NOK and a weaker than expected PMI. The market expects no change at this meeting but there is certainly a better than evens chance that we get a 25bp hike at both the October and the December meetings. Look for the Krone to strengthen all round but especially against the ‘policy tightening laggards’ ie the US, Eurozone and UK.