This Thursday (5, July 2012) saw the Bank of England announce that it would be increasing its quantitative easing (QE) programme by £50bn, taking the total QE to £375bn. However, the lack of movement in the markets suggest that it was fully priced in.
The market moving news from yesterday was of course the European Central Bank (ECB) announcement to cut rates, with the main refinancing rate cut to 0.75% and the deposit rate to 0%, both down 25 basis points. The rate cuts were as expected but the markets took a fairly dim view on the action taken. Trading was volatile and the GBP/EUR rose from 1.244 to 1.254 in the wake of the announcement, now pushing its three-and-a-half year high.
The cutting of the deposit rate is designed to encourage banks to lend as they would now receive no interest on money deposited with the ECB overnight. Mario Draghi said in his statement that the eurozone was likely to show little or no growth and his downbeat outlook did not help the euro or those countries that have been struggling of late.
Spanish 10-year bonds have today reached levels over 7% and threaten to rise higher. 7% and above is considered by many as a dangerous, as well as an unsustainable level of borrowing costs, and was the level at which other countries, such as Ireland, had to request a bailout.
We also saw a surprise interest rate cut from the People’s Bank of China, an indication that growth in the world's second largest economy is slowing more than Beijing had previously expected. The last time the People’s Bank of China cut interest rates was shortly before poor economic data was released, maintaining its strategy of acting pre-emptively ahead of poor data. This most recent cut comes a week before a range of Chinese economic figures are due to be announced, possibly indicating a retracement in growth.
All eyes now turn to today’s announcement of US non-farm employment data due out at 1.30pm. Forecasts anticipate the data to show the number of people in employment grew to 97,000 this month, rising from 69,000 previously.
A positive announcement could lead the US dollar to be investors’ choice of currency and boost demand for the greenback, with traders lodging positions for the weekend. Should the data be worse than expected, we may also see currency flows toward the greenback, as investors become wary of the global economic condition and seek shelter with the relatively-safe US dollar.
The news will also have an impact on a number of other currencies, including the Aussie dollar and New Zealand dollar, with investors' risk appetite heavily reliant on US economic indicators.
Adam Highfield
Analyst, Caxton FX
