Monday, April 14, 2014

Unemployment and the Aussie dollar | Pressure on the ECB to increase inflation

Please note that as this coming Friday (Good Friday, 18th April) is a holiday for all important Forex markets, there will be no OmiCronFX commentary on that day.

For a long time we have been writing about the tendency of the Forex market to react to any and all individual periodic reports when they are announced, while policy makers, particularly in the central banks, are focused exclusively on the trend that becomes apparent over time. This is true in relation to all markets.

Now, according to Callam Pickering, writing in the Australian Business Spectator, even the individual reports on Australian unemployment are not to be relied on at the present time. See his article on the subject here: “The truth about unemployment in Australia”. This is primarily because of a recent change in the sampling methodology for by the labour force survey, but there are other issues too.

In the meantime the Australian dollar has been on a tear, which has been fueled to a very large extent by those same labour force surveys. Are Australian dollar bulls deluded? Read Pickering’s article and make up your own mind.

Pressure on the ECB to increase inflation

The pressure is well and truly on the ECB to carry out measures that will raise inflation in the Eurozone. After a meeting of the IMF in Washington over the weekend just past, it was reported that Mario Draghi, who was in attendance, and his colleagues are considering the reduction of the ECB overnight deposit rate into negative territory. The last time that was mooted there was a sharp reduction in the value of the Euro against all its global counterparts.

While deflation is the bugbear, as it was in Japan during its “lost decade”, it is also recognised that consistent low inflation is equally damaging to an economy. Senor Draghi, when reminded of this by Christine Lagarde of the IMF prior to the last ECB press conference, retorted with comments thanking Madame Lagarde for her input that were dripping with irony. It is one thing to have the IMF as a partner in the bailouts of recalcitrant Euro zone peripheral states, but quite another to find yourself on the receiving end of a lecture from Washington DC, where the IMF is based, and this is particularly so when you are being told something you already know.

Another new development is the rhetoric from the ECB chief that seems to recognise explicitly that the value of the Euro is a factor in all of this. Up to recently, the ECB had held itself above the mundane matter of exchange rates to concentrate on measures that might, or might not, affect the currency. It is probably realised too that attempts to talk down a currency, as Central Bankers from Switzerland to Australia, where such activity is known as “jawboning”, have found to their chagrin, are almost always doomed to failure.

The bottom line in all of this is that there is now definite risk on the side of a reduction in the value of the Euro, by one means or another.


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