The central bank leaders of the two largest economic countries in the world have put their foot in the door to additional stimulus, thus keeping the markets all lathered up, over and over again. I find this exercise to be fruitless. Take my advice, guys: Don’t be the “buy the rumor and sell the fact” crowd. Why not just react when something actually happens? Now that would be revolutionary, wouldn’t it?
The markets, from my view in the cheap seats, have decided to give the euro the benefit of doubt, that the German Constitution Court will approve the ESM funding directly to banks, bypassing governments. Since we won’t know for sure until September, the markets, to their credit, have said, “OK, no sense in beating the tar out of the euro until we know about the ruling.” And the euro received a “get out of jail free card”… for now. Of course, that doesn’t mean the euro is out of the woods, by any stretch of the imagination!
Last night, the Reserve Bank of Australia (RBA) left their official cash rate (OCR) at 3.5% and came to the conclusion that the current stance of monetary policy was appropriate. That means they are more than satisfied with their previous rate cuts, and even mentioned that it’s too soon to see the full effect of the rate cuts made earlier this year. So good for them! No sense in going willy-nilly cutting rates when you don’t need to. The A$ is up slightly overnight, so the nonmove was pretty much expected by the markets.
The euro is up slightly too this morning, popping over 1.24. The Norwegian krone (NOK) has outperformed the euro and most other currencies overnight on the news that June manufacturing production beat the estimates, rising 0.8%. I was looking yesterday on the plane coming home at the latest Big Mac Index The Economist produces. Now, before I go on with this discussion, purchasing power parity is something that people used to use as a way to value a currency. Basically, they do a survey and calculate the exchange rate that would leave a Big Mac costing the same in each country. For instance, here in the U.S., a Big Mac costs $4.33, but costs just $2.29 in Russia. So a dollar buys more Big Macs in Russia. OK, you get the picture.
Read more: Currencies and Metals Rally Further