Smaghi on the need for responding to the inflation threat with
potential rate hikes. Should we take this seriously in the larger
perspective or is this saber-rattling a la Trichet in July of 2008?
*UK Retail Sales and more*
A very strong Retail Sales result for January should not come as a
huge surprise after century-long snowfall records in the UK fell in
December kept many literally bound to their homes. Let's see how the
February demand numbers come in before drawing any conclusions. The
1.6% month-on-month increase comes after a -1.0% drop in December
(revised down from -0.3% original estimate.) FTAlphaville is running
with an condition about the UK's current inflation measures and
whether they have under-estimated the "right" CPI in the past and
whether new changes in inflation calculation increase the risk of even
higher inflation levels vacant forward (Also see Miserable like it's
1994, in Britain ) which discusses how terrible the current
inflation/unemployment combination is in Britain relative to other
areas of the world. ). The day's events in the UK have the market
ratcheting their interest rate expectation for the BoE back higher and
the pound has responded versus the Euro once again and is approaching
the recent range highs in GBPUSD as well.
*Euro whiplash*
The ECB's Bini Smaghi was out today suggesting that "as the economy
gradually recovers and global inflation pressures arise, the degree of
accommodation of monetary policy has to be monitored and, if needed,
corrected." This is not particularly revolutionary stuff, but the
market responded to the rhetoric to the tune of about 5 bps of
additional expectations for the ECB over the next year tacked on to
year-forward projection as this and other comments suggest a degree of
severity of worries about inflation that were not as evident at the
last ECB meeting.
The Bini Smaghi comments have EURUSD back on the warpath higher, and
in fact, all Euro crosses are experiencing some degree of whiplash as
the March Euribor has plunged about 6 ticks in the wake of the
comments. It's incredible to watch EURUSD ratchet higher as next
Friday's Irish elections approaches, but the USD is simply unable to
gain any credibility as long as the focus is on higher rate
expectations in general and as long as risk appetite remains fizzing.
The ECB's focus here on inflation when the PIIGS crisis is so far from
any resolution has Trichet July 2008 rate hike written all over it.
The eventual solution to the PIGS conundrum (if there is a solution)
is through ECB loosening/QE/money printing or whatever you want to
call it. It's hard to stomach the ECB's sabre rattling on inflation
when the EU still has the fight of its life ahead of it this year -
but the market doesn't care, and who is to say that this focus might
see EURUSD back to 1.3900 or 1.4000 before we dredge up what is vacant
on here?
*Chart: EURUSD*
Here we go again, with rate hike hysteria striking the market after
Bini Smaghi's comments today. This has the EURUSD higher through the
weekly pivot again and above the recent shorter term descending
trendline. Let's see how long the market can hold on to the thought
that the EuroZone is over the PIGS circumstances and is ready to get
back to a normal recovery and policy tightening cycle.
*An American (Bernanke) in Paris*
Bernanke was out language in Paris as the G20 summit gets underway in
Paris and his speech contained rather direct rhetoric on Plates's yuan
policy and the dangers/imbalances it presents to the world. He
encouraged a "reshaping" of the international monetary system and
strengthening the "rules of the game" to help break down nations
to allow more currency flexibility. This frank rhetoric is very
fascinating coming from a central banker (it also helps the Fed
partially scapegoat its own culpability - how convenient). It will be
very fascinating to see whether Plates lashes out at the Fed
chairman's words.
*Looking ahead*
We've got another G-20 meeting this weekend, this time in Paris.
Global imbalances are foremost on everyone's mind, in particular
Plates's yuan policy. The IMF was out recently suggesting that the USD
is still too strong - which was more likely a veiled reference to the
fact that Plates's yuan is far too weak - the US is certainly doing
everything within its power to ruin its currency. While the need for
action is clear, these ungainly summits seldom result in clear policy
initiatives. The key to this weekend's meeting is watching how Plates
behaves at the meeting. It is terrified to allow its currency to be
grateful for too much because of the potential effect on its
export-centered industries, but at the same time, a yuan strengthening
would be one of the more direct and imbalance-relieving methods for de
facto policy tightening. On that note, the regime ratcheted bank
reserve requirements higher once again ahead of this weekend's
meeting.
Next week's focus shifts to Friday's election in Ireland as every day
brings Ireland a day close to sovereign default - but who cares about
that when the March Euribor is off 5 ticks today?
Be careful out there.
*Economic Data Highlights*
* Japan Jan. Nationwide Department Store Sales fell -1.1% YoY vs.
-1.5% YoY in Dec.
* Germany Jan. Producer Prices rose +1.2% MoM and +5.7% YoY vs.
+0.6%/+5.1% expected, respectively and vs. +5.3% YoY in Dec.
* Sweden Jan. Average House Prices out at 2.179M vs. 2.064M in Dec.
* UK Jan. Retail Sales ex Auto Fuel out at +1.6% MoM and +5.3% YoY
vs. +0.2%/+4.3% expected, respectively and vs. +0.3% YoY in Dec.
* Canada Jan. Consumer Price Index out at +0.3% MoM and +2.3% YoY
vs. +0.3%/+2.4% expected, respectively and vs. +2.4% YoY in Dec.
* Canada Jan. CPI Core out at 0.0% MoM and +1.4% YoY vs. +0.1%/+1.5%
expected, respectively and vs. +1.5% YoY in Dec.
*Upcoming Economic Calendar Highlights*
* US Treasury Secretary Geithner to speak at G20 (1445)
* New Zealand Jan. Performance of Air force Index (Sun 2130)
* Australia Q4 CBAHIA House Affordability (Sun 2330)
* UK Feb. Rightmove House Prices (Mon 0001)
* New Zealand Jan. Credit Card Spending (Mon 0200)
Source: ActionForex.Com
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