Dollar down, yen up
The market has a strange attitude to US interest rates and the dollar. Federal Reserve chiefs have dropped multiple hints of a rate increase this year and futures pricing puts a 61% probability on a December hike. Yet investors seize upon every excuse to believe it will not happen.
They found another one yesterday. The Institute for Supply Management's purchasing managers' index for the US services sector was supposed to come in at 55.0, a touch lower than the previous month's 55.5. Instead it printed at 51.4, a six-year low and fully four points short of the mark. Investors ran a mile, swiftly marking the dollar lower. On the day it is down by a cent against the euro and by almost that much against the pound.
Tuesday's services PMI was the third disappointment in succession for the higher-rates argument and the dollar. The first two had come on Friday with a sub-50 manufacturing PMI and fewer than expected new jobs in August. The suspicion among investors is that the Federal Reserve lacks the bottle to raise rates and will do so only when the economic data have become compelling. Recent figures have been far from that.
A similar logic applies, in reverse, to the Japanese yen. Until now the Bank of Japan has missed no opportunity to do whatever it thinks necessary to boost inflation. It has bought just about everything it can to put money into the system. Yet now investors suspect it is losing its resolve.
Questions are increasingly being asked, around the world, about the wisdom and effectiveness of wholesale money-printing and negative interest rates. It was suggested today that the same question is troubling the Bank of Japan itself. The BoJ's erstwhile head of monetary policy, Kazuo Momma, told Reuters that the bank is unlikely to deliver the expected extension to its stimulus programme this month.
The yen headed north for the second time in 24 hours, leaving it 1.5% higher on the day. In the year to date it has strengthened by 24% against sterling and by 16% against the US dollar.
When the bank of England governor appears before parliament's Treasury Committee today investors will be keen to hear his outlook for inflation and interest rates. They will also be intrigued to see how Mark Carney deals with his arch-critic, William Rees-Mogg, who sits on the committee.
Mr Carney will have to defend himself against charges that last month's rate cut was premature and alarmist. How he does so could affect the pound.
Of more concrete relevance to sterling, this morning's figures for UK manufacturing and industrial production in July will be the first to cover the post-referendum period. Investors are geared up for both to have fallen in the month. With these numbers there is less chance of the positive surprise that sterling enjoyed with the purchasing managers' index readings. It could be a tricky day for the pound.