Inflation and interest rates
Yeah, I know I’ve already discussed this with you several times in the past, but hey, I had good reason to do so! Inflation and interest rates played a critical role in the first half of the year, and it caused some pretty slick moves on the charts.
High-yielding currencies rallied strong and hard earlier this year on interest rate hike speculation. Everyone thought that central banks around the world would hike rates in response to rising inflation caused by sky-high commodity prices. Remember when oil was at $114 a barrel and looked like it was on its way to match all-time highs? It’s hard to imagine that that was just a month ago!
Interestingly enough, even though the yuan isn’t widely traded, the world also kept close tabs on China and the People’s Bank of China in the first half of the year. China’s aggressive monetary policy tightening had many worried about a potential slowdown in global growth.
Among the more commonly traded currencies, AUD and NZD benefited the most from this period as the RBA and RBNZ were among the first to raise rates. Even the euro managed to stage a rally as the ECB began dealing hawkish remarks. It was also during this time that the U.S. dollar, for lack of a better word, SUCKED as the Fed showed no inclination in raising benchmark interest rates in the near future.
European debt crisis
During the first half of the year, the European debt crisis was like a bad rash that would come and go. One day, the markets would be at peace with Europe’s debt situation, and the next, they’d be pulling their hair out over it as if they’d never heard about it before.
For a moment, all this debt talk actually took a backseat to interest hike speculation, allowing the euro to rise substantially. But recently, concern over the euro zone’s debt problems has returned in light of Greece’s need for another bailout. Needless to say, this has caused crazy swings in the markets!
While European leaders have been scrambling to figure out how to deal with Greece’s problems, traders have been scratching their heads trying to figure out what to do with the euro. As such, sentiment has been shifting back and forth lately, causing choppy price action on EUR/USD.
Persistent Strength of the Franc
Back in January, I predicted that the franc would continue to tear up the charts and that USD/CHF would test the .9000 handle. For the most part, not only was I correct, but the franc has even exceeded my lofty expectations. USD/CHF not only tested .9000, but it broke through and is now testing all-time lows at .8325! For those of you keeping track, that’s a near 12% gain for the franc in 6 months!
Why has the franc suddenly become the king of the hill? As I’ve pointed out in the past, Switzerland’s stable economy, the franc’s safe haven status, and its correlation to gold are just a few reasons why traders have been going gaga for the franc.
Moreover, the strength of the franc is even more amazing when you take into consideration that the SNB has made no inclination that it will be raising rate or the bank’s history of intervening in the markets.
What stories to lookout for in the 2nd half of 2011
Okay folks, halftime is over and now it’s time to ponder what could happen over the next six months. Here are a few stories that I believe we should all be keeping an eye on:
The possibility of QE3. So far, the Fed is sticking to the plan and will let its current asset purchase program come to an end before making any new moves. However, with the U.S. economy still struggling, there is a chance that Ben Bernanke and his merry men may decide that another shot of economic steroids is needed.
PIGS Needing More Money. Now that Greece will most likely be getting another round of bailout funds, what could this mean for Ireland and Portugal? These countries have their own unique problems and who’s to say that they won’t come knocking at the door, begging for more money? I’d be surprised if this issue doesn’t pop up over the next few months.
Commodity Bull Run. After hitting record highs earlier this year, commodities have pulled back a bit. I can’t help but feel as though some traders may see this as an opportunity to get back in the bull run. If commodity prices rise once again, it may just spark another round if inflationary fears, which could lead to more rate hike speculation.