Loonie and Aussie higher on rate expectations

As tomorrow's figures will indubitably show, the recession is over and a new optimism is spreading among consumers. The Daily Telegraph's website carried an article yesterday talking about Christmas demand for the new small Apple iPad, saying "you'll need to get in there quickly to get one for a stocking filler". A stocking filler, no less. How quickly things have moved along! These toys are either £210 or £270, depending upon which side of the Atlantic you live. But now they're merely "stocking fillers". So what qualifies as a suitable "main" present in this post-recession euphoria? A gold watch? A polo pony?

The Bank of England governor is in no doubt about what our banks should be asking for in their letters to Santa; more capital. The speech* he delivered in Cardiff yesterday evening attempted to explain the "paradox of policy" by which the short-term needs of an economic crisis are worst-served by the prudence and caution necessary for longer term stability and success. The media have focused on his remarks about undercapitalised banks. Investors might be more interested in his comment that "the Monetary Policy Committee will think long and hard before it decides whether or not to make further asset purchases." The wording does not suggest a burning desire for them on the part of the governor and that might be of some help to the pound.

It has not done sterling any good so far though. Compared with Tuesday morning's levels the pound is higher against the euro, the franc and the kiwi; lower against the yen, the North American dollars and the Aussie. The biggest change was sterling's three--quarter-yen loss.

The pound is also three quarters of a cent lower against the Canadian dollar. For a week the Loonie had been on the back foot following downbeat comments about the economy from Mark Carney, the Bank of Canada governor. The inference was that Canadian interest rates would not after all be moving higher in the foreseeable future. The effect was to knock two cents off the value of the Canadian dollar. Yesterday the situation was turned on its head again when the governor said that "some modest withdrawal of monetary stimulus will likely be required"; in other words, interest rates will be going up after all. Investors reacted immediately, sending the Loonie more than a cent higher.

Otherwise, excitement was in short supply on Tuesday. BBA mortgage approvals were exactly on target at 31.2k for September and Canadian retail sales in August were almost so, rising by 0.3% on the month. Euroland consumer confidence improved by a third of a point to 25.6, still close to the weakest reading in three years.

Early today a higher than expected inflation figure was positive for the Australian dollar. The 2.0% headline reading for the year to September was well above the 1.2% recorded three months earlier. Otherwise this morning is all about the provisional purchasing managers index (PMI) readings from Euroland and German business confidence. Hidden amongst them will be CBI's report on UK industrial orders. US new home sales come after lunch.

Tonight the US Federal Reserve and the Reserve Bank of New Zealand reveal their latest monetary policy decisions. US interest rates are likely to remain close to zero and the RBNZ's cash rate will probably stick at 2.5%.

*The governor's speech is available on the Bank of England web site. For anyone who wants to know more about monetary policy or what the asset purchase programme is all about it is worth a read. The language is aimed at a lay audience and it doesn't mention quantitative easing once.
http://www.bankofengland.co.uk/publications/Pages/speeches/2012/613.aspx