Accomodative Monetary Policies Contribute to Currency Market Volatility

Press Release

The Federal Open Market Committee has recently stated it would continue to purchase US$85 billion of securities per month and the Fed Funds Rate will remain at its current low level as long as unemployment rate remains above 6-1/2 percent. The US Dollar Index hits a high of fresh 5 – week high around 83.5 last Friday and then corrected. The rally in USD was due to better-than-expected jobs data last Thursday, with Initial Claims posting a 5 and a half year low falling to 323K in the week ended on May 3.The Federal Open Market Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy stance as the outlook for the labor market or inflation changes.

The Euro is currently at 1.29 USD and last week it broke below 1.3000 against the US Dollar for the first time in two weeks .The Euro traded in the range of 1.27-1.35 in the month of April against the dollar. The inflation sinking down to 1.2% YoY in April 2013 from 1.7% in March 2013 was a cause of worry on account of which the ECB cut the rates. It is expected that the rate cut of 25bps is unlikely to boost the growth materially. Euro remains supported by relative monetary policy between the euro zone and the US. If the Fed shifts to a less accommodative stance than the Euro is likely to weaken under the weight of the European backdrop.

The British pound is at 1.54 USD. It fell against the US dollar last week after UK construction and trade data was announced. UK construction output rose by 12.1% in March 2013, which is the largest monthly rise in construction in over a year, still lower than the anticipation for construction output to rise 15.0%. The UK total trade balance was reported at a deficit of (3.13) billion Pounds, slightly worse than an expected (3.1) billion pounds. The Bank of England has opted against pumping more money into the British economy last week. Relative monetary policy temporarily favours the GBP, but as Mark Carney prepares to lead the BoE in June this year, it is expected a more aggressive BoE to emerge, ultimately weighing on the GBP into year-end.

The JPY has broken the current 100 psychological level and is trading at 101.62 to 1 dollar. The Nikkei markets are up close to 40.5% on YTD basis highest in the last five years. It has weakened passed dollar beyond dollar for the first time in 4 years. Japan’s output growth is expected to grow by 1.25% in 2013-14, with the weaker yen supporting the export sector. The recent BoJ policy announcement, which includes the expected doubling of the monetary base to ¥270trn by the end of 2014 and annual JGB purchases of ¥50trn, is likely to drive JPY weakness. The BoJ aims to bring annual inflation to 2% in two years’ time by expanding the monetary base. A falling yen can boost Japan’s automobile exports. The continued accommodative policy of Japan‘s Central Bank and possibility of domestic investors buying overseas bonds can weaken Japanese Yen.

The Swiss Franc is trading at 0.96 as against the US Dollar, the highest since late August 2012 The US dollar surged to an 8-1/2-month high against the Swiss franc last Friday on account of surge in dollar purchases. A recent data indicated that Swiss consumer prices continued to fall on an annual basis in April 2013 which supported the case for the Swiss National Bank to maintain the cap on the franc it introduced to ward off deflation.In Sept 2011 to prevent deflation and a recession, the Swiss National Bank capped the franc at 1.20 per euro.

The Australian dollar plunged to its lowest level in more than 10 months on increased concern about the outlook about Australia. The Australian currency traded recently at $US1.0006 after earlier falling as low as $US0.9961.The weakening trend in Australian dollar, accelerated after the Reserve Bank of Australia cut its benchmark lending rate by a quarter percentage point which surprised the investors. The currency markets have witnessed significant volatility in recent times on account of accommodative monetary policies of various central banks.