Forexs Rates Steady, Inflation Worries

Earlier this morning, Spain had a successful bond auction after yesterday’s successful Portuguese bond auction which is showing a stabilizing force in the Euro zone. So it was no surprise that the ECB left interest rates unchanged, however ECB President Trichet was quick to point out that inflation poses a serious risk to economic stability. This dual action was enough to catapult the Euro higher, as French CPI data and German wholesale prices confirmed his assertion.

In the UK, the BOE also left rates and their asset purchase program unchanged as expected though next week’s CPI data may show rising inflation as well which could prompt a change in policy. The balance between austerity and inflation is going to come to a head in many countries around the globe and how it handled could pose a risk to global economic recovery going forward.

In the US, the trade deficit came in lower than expected as increased demand abroad helped exports. But initial jobless claims came in worse than expected at 445K, vs. an expectation of 410K which shows that the employment picture may not be moving in the right direction.

So today we have Dollar weakness, with stocks and commodities marginally lower.

In the forex market:

Aussie (AUD): The Aussie has traded back to parity with USD despite a weaker than expected jobs report. While the unemployment rate ticked down to 5%, the participation rate also decreased which likely is the difference between the numbers of jobs added which was 2300, vs. an expectation of 25K. (Click chart to enlarge)

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Kiwi (NZD): The Kiwi is also higher as Dollar weakness and Euro strength is driving the markets. While not an entirely risk taking day, commodity prices in NZ were up 2% showing signs that inflation may be heating up.

Loonie (CAD): The Loonie is lower across the board as oil prices and commodities are pulling back, and US economic weakness due to worse than expected initial jobless claims.

Euro (EUR): The Euro is trading higher as renewed confidence that the sovereign debt crisis may be under control and that the ECB is concerned about inflation may lead to change in monetary policy. (Click chart to enlarge)

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Pound (GBP): The Pound is trading similarly to the Euro, except substitute “British austerity” for “sovereign debt crisis”. Next week’s CPI data will show whether austerity measure have been enough to tame inflation, though I doubt the viability of that plan to begin with.

Dollar (USD): The Dollar is weaker against all but the Loonie as PPI data came in hotter than expected, though removing food and energy the numbers came in less than expected. Initial jobless claims moved back toward the “new normal” of 450K, rather than the expectation of getting closer to the 300s. Stocks are lower as a result, and the Dollar is trading with the market today.

Yen (JPY): The Yen is mostly lower though higher than the N. American currencies as a news story reported that China went from a net buyer to a net seller of Japanese yen which is likely to help cause Yen weakness.

The true battle in the world today is going to be how governments are going to manage inflation and encourage economic growth at the same time. It seems like a near impossibility as the problem of falling asset prices will potentially harm the Big Banks, but inflation will harm all of us, especially those who make less money.

The US government has devised a way to get around this by reporting inflation data “ex food and energy”, meaning they strip out 2 of the 3 necessities in life to show why prices aren’t rising. Unfortunately for them, this game is getting old and people have caught on so it is only a matter of time before the public outrage begins.

China is already seeing massive inflation and emerging market countries around the globe have also been battling it for some time. Much of this inflation can be tied to a weak US dollar due to extraordinarily low interest rates and various rounds of quantitative easing.

Throw the UK and Europe into the mix and it is pretty clear that worldwide inflation is a major problem.

So will we see a return to normalized interest rates any time soon?

Unfortunately I say no. Monetary policy will remain accommodative and the general public will bear the brunt of inflation so that home prices *may* remain steady so the banks won’t lose even more money on foreclosed properties.

Meanwhile, this will force China to do something regarding their own monetary policy, and I’m sure that the US secretly hopes this will force them to allow their Yuan to appreciate.

With the current path that we are on now, there is going to be a showdown unless something is done to fix this problem. Unfortunately, I don’t think there isn’t enough political will or cooperation that can get this done. So someone (if not all of us) is eventually going to feel the pain.

Will it be you? Or will you trade currencies to help provide yourself added relief?

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