Tuesday April 21, 2009

A largely unexpected cut leaving Canada’s benchmark rate on a par with the top of the range of the fed funds rate and growing fears over the possibility of backdoor nationalization of some U.S. banks hurt risk appetite earlier today. The dollar in early morning trade has taken a breather from recent day’s gains and buys C$1.2462. The Canadian unit has lost 5 cents from C$1.20 to $1.25 in just four days and so erodes two weeks worth of growing strength in the so-called loonie. The surprise quarter point interest rate cut was steered by a Bank of Canada expressing the potential for stability in rates for as long as one year.

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On Thursday this week the Bank of Canada’s governor, Mark Carney will deliver his blueprint for buying domestic government debt as the Bank adopts its form of quantitative easing. Figures earlier today also surprised to the downside showing a fifth monthly decline in wholesale sales for March, which dropped 0.6% versus an expected 1% rise. The data underscores the sluggish nature of export demand, which remains firmly bogged down.

Monday’s slide in U.S. banking shares continues to weigh heavily on investor risk appetite. While the Australian economy might be well positioned to benefit from a recovery, such an improvement remains a semi-manufactured product of its biggest Asian trading partner of China. Australia may well benefit from infrastructure plans to help bolster up the world’s largest manufacturer as demand for minerals and materials grows, but whether that’s concentrated in this year or next remains key.

Fears for the financial system’s revival strengthened the U.S. dollar and further dampened commodity prices and drove down share prices at commodity and energy producers, which in turn hampered the Aussie unit. Currently the Aussie dollar is higher against the dollar buying 70.22 U.S. cents having reached 69.75 following the Canadian interest rate cut.

Expectations of a further easing in Australian monetary policy received a boost today following the release of minutes from the April 7 RBA meeting when rates were also eased to 3.25%. The minutes recognized the deterioration in the global economy and recognized its potential on the Australian economy. The minutes noted that production would be depressed at least temporarily and that labor markets would ease and unemployment would rise. The medium term implication for inflation was therefore one of weakness, which enabled the RBA to ease policy at the time. Bond prices rallied sharply after the report as expectations grew with investors now expecting a further May policy easing.

The euro is higher this morning after a $1.2925 close against the dollar on Monday. The unit received an ounce of positive news out of the blue as German investor confidence (ZEW index) turned positive for the first time since June 2007 landing at an index level of 13 versus an expected minus 3.5. The euro topped out at $1.2990 following the announcement. Investors now await business confidence from the IFO to be released on Friday, while a slew of purchasing managers’ data is due on Thursday.

The one shred of good news for the Eurozone today is unlikely to help spur a rebound in the euro given the growing weight of other negative numbers. Further, buyers of the euro must weigh up the potential impact of a policy metamorphis from the ECB brought on by differences in various member views on the need or cost of quantitative easing alongside a decision on what’s next for interest rates. Both factors are being forced upon the central bank courtesy of a constantly deteriorating external environment, which contrasts to a typically regimented core European lifestyle.

Finally, the Swiss franc is mixed after the SNB posted data to its website showing a significant rise in its holding of euros through the quarter ending in March. The Swiss central bank now holds 20.7 billion in euros, which is 29% higher than at the end of 2008. The Swiss bank has actively been selling its own currency in an effort to loosen the noose on its exporters constrained by domestic currency strength. The euro has gained marginally against the franc to Chf 1.5110 while the dollar is a little weaker at Chf1.1654, which all means that we should expect to see the charging Swiss arrive in the marketplace once again selling the franc to anyone willing to buy.