- Strong dollar could be dangerous
- People’s bank of China cuts reserve rate
- Greece debacle dragging on
- Pound still feeling election relief
The dangers that the USD poses to emerging markets are both inevitable and existential. Inevitable in the way that a global rebalancing of monetary policy away from this atmosphere of uber-stimulus has to be led by the Federal Reserve and existential because it calls into question the overall funding and spending models of these countries and the companies within them. We will be looking to their Retail Sales report on Wednesday to get a pulse on the economy.
April saw the People’s Bank of China cut their reserve requirement ratio by 1% to try and encourage banks to lend more money. May has seen outright cuts in interest rates with the main lending rate reduced by 0.25% to 5.1% this weekend. Inflation and growth are both slowing in China and, so far, these monetary policy adjustments have yet to make a positive impact. Of course, these movements stand in direct contrast to the likely path of interest rates in the US – each other’s biggest trading partners.
In what has become the economic equivalent of Groundhog Day, we have another Eurogroup meeting on the Greek situation today. Progress is inevitable but there is little reason to believe that it will be enough to unlock any additional funds from the IMF or the European Union. The euro is lower as we open up the week’s markets.
Wednesday’s Quarterly Inflation Report from the Bank of England and employment report as well as industrial production numbers on Tuesday are likely to give us a more complete, if potentially sanguine, view of the UK economy.
EUR-USD is lower this morning as we open up the Eurogroup meeting on Greece. News reports have continued to churn out lines that positive outcomes are not expected and that ‘days to weeks’ are needed for a deal. There are just over 6 weeks until the end of June deadline. I expect the Europeans to wait until the last minute to pull a deal out of the fire.
GBP-USD is rising as the post-election swell helps the pound further. There is the definite possibility of a disappointment in this week’s run of UK announcements but, for now, the relief of a majority government is still being felt.
AUD-USD has been dragged lower this morning on fears over the Chinese economy, and the belief that further monetary policy easing will be needed. Thoughts that the Reserve Bank of New Zealand will have to cut rates soon in New Zealand has seen the NZD 1.5% lower and there is some leakage into Australian sentiment as well.
USD-CAD is roughly where it was before Friday’s jobs reports from both the US and Canada and I am looking for it to remain above the 1.20 level for the rest of the week.