There is a mixed tone in the global capital markets today. Asian shares were mixed with declines in the Nikkei (-.07%) and Shanghai (-2.9%) being offset by modest gains elsewhere. European bourses are also mixed and the Dow Jones Stoxx 600 is off slightly. European bonds benchmark bond yields are lower though US yields are firmer.
This Great Graphic, composed on Bloomberg shows a potential head and shoulders bottom pattern in the Australian dollar. The left shoulder was set in the first part of the month near $0.6930. The head was carved out in four sessions around the middle of the month a cent lower. The right shoulder was created over the past two days, with yesterday’s spike to $0.6920, before staging an impressive recovery.
The first two and a half weeks of the New Year saw persistent selling of equities, commodities, and emerging markets. In the foreign exchange market, the dollar-bloc and sterling were crushed. The yen was the single biggest beneficiary, and speculators in the CME are net long the yen in the futures market for the first time since late 2012.
On the last day of November, at the conclusion of its five-yearly review of the composition of the Special Drawing Rights (SDR), the IMF elevated the renminbi to its SDR basket. The RMB is now one of five major ‘freely usable’ reserve currencies in the international monetary system.
The US dollar remains strong against most currencies. The exceptions are the Japanese yen, Swiss franc and euro though the franc and euro pulled back in the US afternoon before the weekend. The greenback is still appreciating on a trade-weighted basis, which is the metric that counts in assessing its impact on the overall economy.
Sterling fell 4.25% from the high on December 28 to yesterday. It has been confined to yesterday’s range today. After finishing below the lower Bollinger Band yesterday, it has moved back into the band today.
The Bank of England meets tomorrow. It is way too early to seriously look for a change in policy. At most, MPC member McCafferty may abandon his formal call (dissent) for an immediate rate hike. He has done this before. We suspect if the hawk does rejoin the majority; it will have no more significance than his dissents.
A subdued Chinese session, with the yuan, little changed and local equities securing minor gains, let market participants look elsewhere for directional cues. The new lows in oil, near $30 a barrel, and the bankruptcy filing of Glencore’s US subsidiary Sherwin Alumina seemed to weigh on the dollar-bloc currencies.
However, sterling has the distinction of being the weakest of the majors. It is off about 0.4% near midday in London following disappointing BRC sales (0.1 vs. 0.5% expectations) and then a dreadful industrial production report.
The broad measures of the US dollar are trending higher, and former Fed Chair Bernanke recently refuted claims the US was engaged in a currency war. Many observers had thought that with its unprecedented asset-purchase program, the BOJ was engaged in a currency war. However, the yen has been the strongest major currency over the past six months, and its export volumes are contracting on a year-over-year basis.
Bitcoin enthusiasts have recently been roiled by claims that an Australian named Craig Wright and his deceased partner are the mysterious founders behind the cryptocurrency.
Last year was the fourth consecutive year that the yen fell against the dollar. However, obscured by this factoid is that over the past six months, the yen has been the strongest of the major currencies, rising almost 3.2% against the US dollar.
