BOE Says: No Change!

The British pound (GBP) is lower today after the Bank of England left interest rates unchanged at a record-low .5% for the foreseeable future.  They also made no change to their bond buying (quantitative easing) program.  While these moves were not unexpected, it is indicative of the greater economic problems going on in the UK.  Housing prices rose the fastest last month, yet there are no other signs of economic improvement.  This could cause further pressure on the pound, if bond investors start to pull out of the UK to seek higher yields elsewhere.  In fact, an analyst at BNP Paribas analyst is predicting a 12% decline for GBP in 2010 as it “falls off a cliff”.

From the “well that settles that” department:

New Japanese Finance Minister Naoto Kan says that he favors a weak yen (JPY).  Ask and you shall receive.   As a result, the yen is down across the board today.  This is in stark contrast to his predecessor Fuji, who wouldn’t say outright that he favored a weak yen.  Kan says he will keep the yen at an “appropriate level” and doesn’t want a strong yen to derail economic recovery.

As the yen has resumed its place as the carry trade vehicle of choice, expect to see intervention should the yen strengthen at all during 2010.  The only way that this happens though, is if we see the “flight to safety” trade pick up if there are problems with world economic markets.

Aussie Rules!

The Australian dollar (AUD) is at a 25-year high against the British pound (GBP).   The commodity currencies have been on fire since the start of 2010, as gold and oil has been trading higher and investors are all for risk-taking this early in the year.  Something to remember is that fund managers and large traders are usually willing to take greater risks early in the year, as they realize they have the entire rest of the year to make back any potential losses.    So I expect to see gold and oil move higher in early 2010, which should take the commodity currencies higher with them.

Barring another financial crisis or a US Fed rate hike, this should be a pretty decent play.  Keep an eye on the stock market and commodities to see if this holds up.  I suspect we are going to see some commodity inflation, although the “official” inflation figures are ex-food and energy so don’t count on the Fed to recognize it anytime soon.  It doesn’t take a rocket scientist to figure out that $3 gasoline or $5 milk is inflationary, yet the government will tell you otherwise.

The picture for the outset of 2010 is starting to become more clear.  Tomorrow’s Non-Farm Payrolls report will be extremely important as it will show whether or not all of the stimulus is working and whether or not the US economy is improving enough for the Fed to begin to think about raising rates.

So all eyes are on this report at 8:30AM EST tomorrow.  This will set the tone for Fed policy in 2010.  So be sure to check back for my commentary on the report!

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