Summers Falls And Takes The Dollar With Him
The news that Larry Summers had withdrawn his application for the position of Fed Chair came to us late last night, but it has been the key driver of price action through the Asian session. The dollar has weakened across the board as it now looks a dead certainty that the job of the most important technocrat in the world will go to the considerably more dovish Janet Yellen. Summers was always more likely to bring rate rises in sooner than the other candidates, and the belief that looser monetary policy is here to stay has weakened gold and the greenback – with stocks excelling and emerging markets fighting back. The Fed meet this Wednesday to discuss the possibility that the US economy is strong enough to see a reduction in stimulus. The lack of comment from the Governors themselves is telling in its own way; the decision is likely to be very close when passed down at 7pm BST this Wednesday. A continuing belief that a non-violent resolution can be found to the immediate chemical weapons issues in Syria have also pushed equities higher and havens lower. Talks between Secretary of State Kerry and Foreign Minister Lavrov seem to have ended in a deal to inventory the Syrian regime’s weapons this week, and have them destroyed by mid-2014. Hopefully we can get a similar resolution on the use of conventional weapons, given they have done 100x the damage of the supposed weapons of mass destruction. I can’t see that happening anytime soon though. A by-product of weakness USD is that EUR/USD has continued to move higher and is threatening the 1.34 level once again, having tested that area in both June and August. You would suspect that the monetary authorities in the eurozone will remain downbeat on the European situation to try and generate some single currency weakness. Draghi speaks this morning in Berlin at a conference of German SMEs. If that wasn’t enough, the IMF is due in Portugal today for the latest review of Portugal’s books in line with the Troika’s bailout terms. Portugal has been out of the headlines since the government came to the verge of implosion earlier this year although bond markets have pressed yields back towards those strained levels. The data calendar today is on the quiet side, but heats up later in the week. UK releases include inflation tomorrow, MPC minutes on Wednesday, with retail sales and public finances on Thursday and Friday respectively. European volatility will come from tomorrow’s German ZEW announcement in the lead-up to this weekend’s German election.