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Today's comment is by Chris Gaffney, CFA and VP of World Markets at EverBank.
Good Day Currency Traders!
It's officially "Interest Rate Decision" week around the world.
As you know, interest rates are one of the key drivers of currencies. When interest rates rise, traders tend to invest in that particular currency and as a result, that currency appreciates in value.
The opposite is also true. When central bankers slash interest rates, currency traders tend to run for other higher-yielding currencies (and as a result, that currency left behind drops in value).
So it should be an interesting week for the currency markets because we'll hear a number of central banks announce their new rates.
From where I sit, I'm thinking the rate announcements will reinforce what we've been saying all along. The world's economies will soon head down different paths. Some economies will continue down a recessionary path, while others will restore their good growth rates.
As expected, the U.S. unemployment rose to the highest level in more than four years. Employers cut 51,000 jobs again in July. But the decrease in payrolls was slightly less than forecasted, so some are saying "it isn't as bad as we thought."
But an increase in the jobless rate from 5.5% to 5.7% and stagnating manufacturing jobs certainly point to a continued recession in the United States. And those employees who are still working have seen their hours cut to a record low.
The total number of hours worked in July declined by .4%, indicating the economy took a turn for the worse entering the third quarter.
What's Weighing in on Your Dollar This Week
Payroll cuts combined with decreasing property values, stricter lending rules and near record energy prices will also send Americans' personal income into negative territory before all is said and done.
Reports this morning showed a tiny gain of 0.1% in personal income and a small gain in personal spending of 0.6% during the month of June. But that's not likely to continue going forward.
Today, we also saw the Fed's favorite measures of inflation, the PCE Deflator. Everyone expected the PCE Deflator to show that prices jumped the most this year in June. And the market took that as a sign there will be more rate hikes. (As it was, the PCE Deflator was only up 0.3% - a bearish sign.)
But nevertheless, the markets still expected the PCE to jump. That's why the dollar gained some ground early this morning during early European trading.
The FOMC will announce their interest rate decision tomorrow, and everyone is predicting they will hold rates steady (as if they have a choice!).
As usual, you can expect the markets to dissect the Fed's statement tomorrow. Everyone will be trying to predict the FOMC's next move.
For now, the Fed continues to be stuck in the unenviable position of dealing with rising inflation and a slowing economy. I can tell you right now: Don't expect any change from the "wait and see" language they have been spoon feeding us so far.
The Fed Just Can't Raise Rates This Week...
No Matter How Much They Want to
My colleague and fellow writer at EverBank, Chuck Butler is heading out to San Francisco for another investment conference later this week. Last night, he emailed me his thoughts on the upcoming week:
"I was reading a story in the Post this weekend, by John Berry, the former Fed-Head, that pretty much stated what I've been telling people..."
He wrote: "The Fed won't raise interest rates this week. And in my mind, they probably won't this year. Yes, inflation is rising, but it's not wage spiraling inflation that usually pushed the Fed-Heads to raise rates. And with the housing, credit, liquidity, and financial institutions problems running rampant, the Fed-heads just can't raise rates, as raising them would make all those problems balloon! Yes, I know, the Fed-heads have been great at creating bubbles, but this would be worse than a bubble...It would be a Hindenburg!"
As Chuck points out, the Fed simply can't raise rates this week. With all this poor data, I wouldn't be shocked if they dropped rates again.
Big Ben and his compatriots have been paralyzed by the combination of rising inflation and a slowing economy. As we have been saying, the FOMC will be forced to grab onto their seats and hold on for the ride.
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