Economic events of this week

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Monday: The Final estimate of the Eurozone’s Consumer Price Index will be released. Analysts expect for it to remain at a moderate annual 0.5%. In the U.S., the Empire Manufacturing survey and May’s Industrial Production data will be released. Tuesday: May’s Consumer and Producer Price Indices are scheduled for release in the U.K. The ZEW survey will be released in Germany. In the U.S., May’s Consumer Price Index, as well as Housing Starts and Building Permits data will be published. Wednesday: Japan will publish May’s Trade Balance data, where analyst consensus sees the deficit widening to over a trillion Yen. The U.S. is due to host the weekly MBA Mortgage Applications. The day will also see the all-important FOMC rate decision published – analysts expect the FOMC to order QE3 tapered by another 10 billion dollars, setting it at a monthly 35 billion. Thursday: April’s All Industry Activity Index will be published in Japan. May’s Retail Sales data will be released in the U.K. In the U.S., both the weekly Initial Jobless Claims, as well as May’s Leading Index will be published. Friday: Advance figures of June’s Consumer Confidence will be released in the Eurozone.

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Normalizing global monetary policy

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Carney’s support of a more hawkish Bank of England policy quickly translated to the local sovereign bond market. The 2-year Britain Government Bond traded at levels reflecting around 0.82%-0.83% yield during the start of Friday’s session, versus 0.72% at the end of the previous day. The idea of less Sterling infused into the markets has also strengthened it against the dollar by an approximate 0.6%, to a level of 1.694. When this will translate to an actual policy change is a broad question. The Bank of England’s Official Bank Rate has been fixed at 0.5% for more than five years. All analysts currently surveyed on Bloomberg expect the BoE to keep rates unchanged at its upcoming rate announcement, on June 10th. On the other hand, the aforementioned rise in BoE rates means that investors see that taking place sooner or later. Economic conditions in the U.K. are generally more upbeat than those of other developed economies. For instance, the local Consumer Price Index was last published to indicate a 1.7% year over year increase of prices, after being just shy of 2% in recent months. The same cannot be said regarding many countries in the rest of the Eurozone, with a Eurozone aggregate print indicating a 0.5% annual increase of prices. The bottom line is that the path to normalizing global monetary policy goes through at least one central banker declaring economic settings as reasonable. Mark Carney may just be that central banker. Join Anyoption and take advantage of the volatility of the markets ..Start Trading TODAY!

Not everyone is dovish in the E.U.

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The ECB’s decision to cut interest rates, on June 5th, helped push the notion that monetary stimulus has yet to become a thing of the past, and that the only monetary tone at the European Union is a dovish one. The dovish approach is willing to stimulate the economy through accommodative monetary policy, even at the expense of the risk of inflating a financial bubble or two. It also made global central banks, such as the Fed, more cautious in regards with dispersing hawkish forward guidance. Evidently, with the ever-more-important role monetary policy took in shaping economic activity in recent years, comments going against the stream are prone to be retorted with a violent capital market response. This premise, however, was countered last Thursday by Bank of England Governor Mark Carney, who delivered a rather hawkish speech At the Lord Mayor’s Banquet for Bankers and Merchants of the City of London. In his speech, Carney mentioned strong indicators regarding the United Kingdom’s economy, such as the Bank of England’s staff projection of an annualized 4% increase of GDP. On the other hand, Carney described the economy as "over-levered" and its housing market as having a potential to "overheat". Additionally, the weak Sterling was insinuated to lead current deficit to a record level. Deeming necessary a remedy to the above situation, Carney moved on to note of "great speculation" regarding the exact timing of the first rate hike. The tone then turned rather hawkish as Carney said that the decision for the first rate hike is becoming "more balanced" and that "it could happen sooner than markets currently expect".

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A new player

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The Dollar’s status as the world’s reserve currency knew its difficulties. Towards the late 1960’s, the number of dollars worldwide far exceeded the amount of gold at the Fed’s vaults. This led the Fed to announce it will no longer be able to convert dollars to gold at the aforementioned ratio, or any other, effectively departing from the gold standard. Another act often considered to counter the depart from the gold standard was an agreement signed between the U.S. and Saudi Arabia in 1973, by which Saudi Arabia's oil sales would be denominated in U.S. dollars. Naturally, this incentivized oil purchasers to hold U.S. dollars, thus creating the "Petrodollar System".


The Dollar’s status was further brought into question in recent years, as the Fed’s dovish monetary policy resulted in a surge of dollar notes entering circulation, or rather the vaults of various foreign entities. Primary central banks responded to the Fed’s actions and sought to weaken their own currency, in order to preserve their local industries competitive exporting edge. Most notable among these were the ECB and Bank of Japan. 

In 2008, at the beginning of the financial crisis, the People’s Bank of China chose to peg its currency, the Renminbi, to the dollar at a fixed rate. The Renminbi strengthened from 6.83 CNY to the USD in June 2010, to around 6.21 nowadays. Additionally, China increased the amounts of gold at its vaults in recent years, paving to road to speculation that the Renminbi could someday replace the dollar as the world’s primary reserve currency. Many of the worlds' central banks either already shifted portion of their reserves from USD to CNY, or are planning to do so. Nigeria and South Korea are two examples.

Many of China's recent deals to purchase energy, including the giant natural gas deal signed last month with Russia, are rumored to be denominated in CNY and not in USD, effectively circumventing Petrodollar. However, it is hard to imagine the Renmibi taking the crown as the world's top reserve currency without China further opening its capital market. A global interest in Renmibi could lead to its appreciation, which would work against Chinese exporters. That means that gaining the status of a reserve currency, which was very lucrative in the past, seems nowadays more as a honey trap. 

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Fast forward to modern times

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In the 19th century, the GBP took the center stage as a globally used currency. Originating as commodity money, by the time it became globally accepted, it did not consist of any precious metal, but appeared in the form of Bank of England notes baring the right to be converted to gold, known as the “gold standard”. The fact that Britain was by far the most predominant global economic force at the time made the Pound globally accepted. At some point, it started making sense to use the Pound not only as currency, but as a mean of reserve - thus establishing the Pound as a “reserve currency”. When many global central banks began doing so, it enabled the BoE to issue more notes, without fearing the subsequent inflation.

No empire reigns forever, and the Second World War left the United Kingdom battered and bruised. The U.S. used this as an advantage at the 1944 Bretton Woods Conference, and set the dollar as the world’s primary exchange currency, by fixing its rate with that of 44 Allied nations, and setting a gold standard of 35 dollars per an ounce of gold. This act made the dollar the new global reserve currency, a status maintained up until this very day. 

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Brittle safe havens

Recent weeks' strengthening of the USD against the EUR, alongside the decrease of U.S. yields, has strengthened the dollar's status as the world's financial safe haven. While gold and other precious metals have always seemed to retain their value, the same had only applied to few selected currencies. Today we will review some of the process of consolidating monetary systems, and place the dollar's status in context. 

Currency is often defined as any physical mean that is used as a medium of exchange. Historically, many currencies existed only within a local scope, but the rise of global trade necessitated a medium of exchange that would be generally accepted and would be able to maintain its value. In the ancient world, precious metals were the obvious choice, mostly being conveniently minted to “standard” weights. These weights became synonymous with their value as currency. The ambiguity between the money and the commodity it was made of led to defining it as "commodity money". Two such examples of commodity money were the Chinese Tael and Greek Drachma. 

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Economic events of this week

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Monday: Japan’s Ministry of Finance will release data on Capital Investment during Q1. April’s Mortgage Approvals data will be released in the U.K. Analysts expect to see the boiling market slightly cooling down, with an expected 64.5K approvals, versus 67.1K last month. The final estimation of Markit Manufacturing Purchasing Managers’ Index for May will be released in the U.S. Also due is the Institute of Supply Management’s Manufacturing Index.  

Tuesday: More data will be provided regarding the U.K. real-estate market, with the release of the Nationwide House Price Index. Unlike mortgages, however, analysts see this indicator continuing its rampant 10.9% annual increase. The Eurozone’s April Unemployment rate, and preliminary May Consumer Price Data are also due. In the U.S., April’s Factory Orders data will be released. 
 
Wednesday: Preliminary indications regarding the Eurozone’s Gross Domestic Product in Q1 will be released. In the U.S., the weekly MBA mortgage applications report is also due, following a negative 1.2% decline released previously. Also expected in the U.S. is May’s ADP Employment Change and April’s Trade Balance.  

Thursday: April’s Factory Orders data will be released in Germany. Analysts expect the month to present a 1.4% monthly increase, following a 2.8% monthly decline in March. On the monetary front, the Bank of England is expected to announce its official bank rate, but analyst consensus tilts towards no change taking place. The ECB is also due to publish rates. Draghi’s dovish tone has certainly shifted analyst consensus to see the ECB to take SOME action. Concluding the day, the weekly Initial Claims will be released in the U.S. 

Friday: U.S. labor market statistics will be released in the shape of May’s change in Nonfarm Payrolls and Unemployment rate. 

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