Weekly snapshot of the world's financial markets
An interest rate cut by the Reserve Bank of Australia coincided with an emergency call between G7 officials, leading to expectations that central banks from around the globe were preparing to ease pressures in financial markets.
The developments helped the euro and other risky assets rebound, with the safer US dollar and yen losing ground quickly.
However, investors were soon back in panic mode after the European Central Bank, Bank of England and Federal Reserve gave no indication that central banks would help mask Europe’s structural flaws with more monetary easing.
The euro’s outlook turned even gloomier after rating agency Fitch reacted to the troubles brewing in Spain’s undercapitalised banking sector by lowering Madrid’s credit rating close to “junk”. The announcement was another counterproductive development for the Spanish government hoping to avoid any type of bailout. As a result, the euro was forced to give up gains that had taken the shared currency to 1½-week highs against the US dollar on cautious optimism eurozone governments
were preparing a big announcement.
Following the European Central Bank’s decision on Wednesday to refrain from cutting interest rates or use more unorthodox liquidity measures to help counter the regions economic, fiscal and banking woes, the onus is very much back on eurozone politicians. No new developments next week could put the euro under an even heavier weight ahead of Greece’s make-or-break elections on June 17.
Sterling sank to one-month lows against the euro and stayed under broad pressure ahead of the Bank of England’s monetary policy meeting.
With UK markets closed for the Queen’s Diamond Jubilee celebrations, global traders shunned the pound on worries policymakers would sanction another round of money printing in order to pull the British economy out of recession.
Sterling then bounced accordingly after the BoE made no changes to interest rates or the size of its quantitative easing programme.
UK next week
Recent PMI surveys on Britain’s construction and services industries indicate the UK economy may be a little more robust than analysts suspect.
However, manufacturing remains a big worry.
Should upcoming manufacturing output data miss forecasts, investors will look to comments from Chancellor George Osborne on the country’s economic prospects in a speech on Thursday.
Comments from key Federal Reserve officials put the US dollar under early pressure, hinting that another round of quantitative easing was very much on the table. Coupled with the previous week’s dismal employment data, the remarks encouraged investors to sideline safe haven bids and ramp up on negative dollar bets.
However, that sentiment quickly fizzled following data showing improved US service sector growth in May and a sharp drop in weekly jobless claims.
The week ahead
The US dollar is very much back in command in foreign exchange markets, especially after Ben Bernanke, in an address to US lawmakers on Thursday, gave markets no clear signals that the Fed was nearing another stimulus injection that has a devaluation effect on its currency.
With Europe back under the spotlight ahead of next week’s Greek elections, unless eurozone governments announce plans to reinforce the region’s firewalls, the safe haven dollar could potentially touch new record
The yen’s progress was mixed, similar to its close rival the US dollar. Hopes of a G7 co-ordinated response to Spain’s banking crisis, while China’s central bank delivered an unexpected interest rate cut that could help boost growth in Asia’s most influential economy.
Subsequently, the developments helped soften the yen’s safety appeal although the Japanese currency was soon a target amongst currency players again after Spain suffered another big setback in its bid to avoid a financial rescue.
The week ahead
Despite the yen’s strong finish on Friday the Japanese currency remains close to a two-week low against the US dollar as investors become nervous ahead of the Bank of Japan’s upcoming policy announcement. The prospect of policymakers applying more downward pressure on yen in order to accelerate a recovery in local export markets might encourage a little diversification out of the yen and into other refuge currencies such as the Swiss franc. However, next week’s Swiss National Bank meeting and looming Greek elections could yet reinforce the yen’s allure.