Moneycorp: Dollar down = euro up [14/12/2010]

Moneycorp: Dollar down = euro up [14/12/2010]

– Sterling left behind again
– UK inflation figures today

Good morning. Nassim Nicholas Taleb, the chap who introduced the Black Swan* concept, has published a book of aphorisms entitled The Bed of Procrustes. Here are a couple of them to ponder: The curious mind embraces science; the gifted and sensitive, the arts; the practical, business; the leftover becomes an economist: There are designations, like “economist”, “prostitute” or “lawyer”, for which additional characterisation doesn’t add information: Anyone voicing a forecast or expressing an opinion without something at risk has some element of phoniness; unless he risks going down with the ship this would be like watching an adventure movie.

This author does have something at risk apart from his job; a natural shortage of euros, which is a pity in view of that currency’s performance yesterday. The Swiss franc and the euro left the rest of the field choking in their dust. At the tail end, too far back even to see the dust, was the US dollar. There were two reasons for the lower dollar. One was an enhanced risk appetite among investors which took equity markets and commodity currencies higher. The other was a comment from Moody’s credit rating agency to the effect that the latest US tax deal increased the likelihood that US government might be put on negative watch. Even though that is two steps – and probably two years – removed from a downgrade it was unhelpful to the dollar.

From the euro’s point of view the retreating dollar left it little option but to go up. There were no ecostats to help it on its way, just a story that the European Commercial Bank had bought another €2.7 billion of government bonds.

Sterling struggled under the weight of yet another negative house price index and came under friendly fire from Bank of England Deputy Governor Charlie Bean. Although his speech studiously avoided the suggestion of a second round of quantitative easing Mr Bean found himself cornered when it came to the Q&A session. In a sort of bad-news-good-news trade-off he first admitted that “It is certainly possible that we may well want to undertake a second round of quantitative easing if there is a clear sign that UK output growth and, with it, inflation prospects are slowing” before going on to say that “Equally at some juncture it will be appropriate to start withdrawing monetary stimulus.” He rounded off his answer, in true economist style, by saying, honestly but not entirely helpfully, “There are risks on both sides”.

Today’s UK house price figure is brought to you by the Royal Institute of Chartered Surveyors. Its house price balance (the number of agents reporting higher prices minus the number seeing falls) improved from a horrible -49% to a slightly less horrid -44%. Analysts had expected it to go the other way so it was theoretically good for sterling but no evidence of that is to be seen in the pound’s performance this morning.

The Australian dollar managed to get away with a couple of duff data earlier on. Housing starts fell by -13.2% in the third quarter and NAB’s measure of business confidence worsened, down from 8 to 6. Nobody paid much attention to the Japanese figures either. A -2.0% fall in industrial production passed by unnoticed.

Today’s list of statistics is considerably longer than Monday’s. UK inflation heads it up at half past nine followed, half an hour later, by Euroland industrial production and ZEW’s survey of German economic sentiment. At half past one North America offers Canadian labour productivity and leading indicators, US producer prices and retail sales. This evening the Federal Open Market Committee makes its six-weekly monetary policy decision.

The inflation figure this morning almost doesn’t matter, inasmuch it will have zero impact on interest rates. That will probably not prevent the market taking sterling for a walk once they have seen it.

* Taleb’s “Black Swan event” is one that cannot be predicted. Before Europeans visited Australia they had only ever seen white swans and assumed, quite reasonably, that all swans were white. The discovery of a black swan forced them to revise their thinking.


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