Thursday, July 05, 2007
The first Thursday of the month is generally busy in Europe, as that is the day when the Bank of England and the ECB (excepting August) announce their interest rate decisions. Today, the BOE is expected to put rates up by 0.25%, while the ECB, via Jean-Claude Trichet's annoying series of code words, is expected to signal a rate rise when it comes back to work in September.
The dollar continues to trade poorly, and once again it would probably be foolhardy to ascribe too much in the way of tectonic fundamental shifts as the catalyst. Simply put, someone is selling it; therefore, it goes down.
Insofar as fundamentals are driving currencies, markets seem fairly happy to discount further rate rises in Europe while forecasting unchanged rates at best in the US. All well and good. However, there seems to be little sense in Europe that rates are restrictive; indeed, the ECB has gone out of its way to state that they view rates as remaining on the accommodative side.
How they arrive at such a conclusion is difficult to say, unless they use money growth as their primary criterion. Short rates are right at their post-unification average in Germany and well above their ten and fifteen year averages. Moreover, it is also clear that some interest rate-sensitive economic sectors in Europe are beginning to feel a pinch- perhaps those belts have been tightened more than central banks realize?
Ireland, while a very small economy, is useful as a leading indicator as it has both a floating rate liability profile and a penchant for housing speculation/accumulation. And the news there is far and away from suggesting that rates remain accomodative. Nationwide house prices are rising just 2.6% y/y, well off the recent peak and approaching the nadir established after the dotcom bubble burst. A report (sadly unavailable in linkable form) from Davy stockbrokers suggested that housing registrations (akin to permits) fell 61% (!!!!!) y/y in May, unsurprisingly the worst reading on record. If that's a product of accommodative policy, look out below when rates get restrictive!
The UK, meanwhile, has a dirty little secret: a distressed subprime underclass of its very own. While early action from the regulators will almost certainly head off any US style subprime credit crunch, Macro Man looks around him and wonders when the economy will hit the wall. Certainly the horrible weather suggests significant downside risk for retail sales in June (albeit with a catchup in July as the sales get frontloaded); what will happen when 2 year fixed rate mortages (taken out in 2005) get reset in Q3 and Q4?
There's no trade here and now, and Macro Man of all people knows the folly of standing in front of Voldemort when he has a EUR/USD axe to grind. Perhaps we are in the midst of a range adjustment, from 1.33/1.37 to 1.35/1.39. But the vehemence of the move, combined with virtually no discussion/discounting of when European rate cycles might end, are forcing Macro Man to scratch his head and, by and large, sit this one out.