Currency Watch: Enjoy the Doldrums

The summer doldrums may finally be upon us.

For all the headlines about “crisis here” and “Armageddon there”, the FX markets have been fairly quiet in recent weeks – although there has been a big slip in the value of the euro.

Everything in FX hangs on one thing at the moment and that is the role of the Fed through the second half of the year.

Should the Fed feel the need to initiate another round of asset purchases then we should see commodity currencies such as AUD, NZD, CAD and ZAR fly as hot money flies into these areas in order to take advantage of high yields.

GBP will not benefit from this, but yet it continues to be trading nicely against the euro and remains near 3.5 year highs.

Elsewhere the IMF has been repeating calls for the ECB to open the liquidity taps and get a true “lender of last resort” going. Unfortunately there’s a lot of EU legislation that explicitly stipulates that this cannot be done and you can be sure that if Angela Merkel’s attitude to Eurobonds was “not in her lifetime” then the ECB opening the taps will be viewed in the same way.

There is a lot of political action in the EU today, with both German and Finnish parliaments debating the finer points of the bailout to Spain.

Spain saw protests over the weekend by public sector workers against the most recent austerity measures and further pain has come from an auction that has only seen yields move above 7%. This followed the budget minister, Cristobal Montoro, saying that: “There is no more money in the public coffers”.

Yields had remained and have been increasing since the market realised that the latest banking bailout for Spain was nothing more than another Euro-fudge.

For now, let’s enjoy doldrums.