US Dollar Could Be Supported Due To Sino-Japanese Standoff, Markets Nervously Await Spanish Bond Auction

Modified: Wednesday, 19 September 2012 19:01 BST - Written by John Cameron

STORY LINK US Dollar Could Be Supported Due To Sino-Japanese Standoff, Markets Nervously Await Spanish Bond Auction

This morning’s Bank of England minutes suggested that the recent easing bias of the UK’s monetary policy may be set to continue. Talk of ‘subdued and uncertain’ growth suggest that the nine-man committee feels that Britain’s flailing economy will require further assistance sooner rather than later. It looks likely, in spite of the committee’s prediction that UK inflation will recede at a slower pace than had previously been anticipated, that November’s policy meeting will bring another hefty tranche of Quantitative Easing for the UK. Sterling is likely to struggle to break significantly higher against any of the other majors, with the potential exception of the euro, in coming weeks whilst the dark cloud of further QE looms over the UK.

Meanwhile, in the eurozone, Spain’s public finances will come under close scrutiny tomorrow, with the latest auction of Spanish long term government debt. As recently as two years ago, most Spanish gilts were held by foreign investors. The latest estimates are that only 30% of Spanish bills are currently retained by sovereign wealth funds and foreign governments. The market for the troubled Iberian state’s bills appears to be dwindling – if this afternoon’s debt sale confirms this, then the single currency may come under renewed selling pressure.

Elsewhere, the Bank of Japan has followed the ECB and the Federal Reserve’s lead by announcing further extraordinary monetary policy measures during last night’s Asian session. The BoJ is set to extend its asset purchase scheme by US$126bn in an attempt to oil the wheels of its under-pressure economy. The news saw Asian equities markets post a strong showing overnight, but fears regarding the ongoing stand-off between Japan and China over the ownership of the Senkaku Islands has the potential to reverse these tentative gains at a moment’s notice. Such a scenario would see the safe-haven US Dollar strongly supported.

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