Markets continued to operate quietly into the Christmas holiday, with equity markets looking for the expected ‘Santa Claus’ rally! Asian markets were surprised by the seemingly innocuous actions of the Bank of Japan yesterday, when they widened the cap on interest fluctuations, on their 10 year Government bond. They doubled the tolerance from 0.25%, to 0.5%, which was seemingly trivial. This is the only concession the Central Bank has made on monetary policy since the global inflation crises began. Is it a signal of a crack in the dyke? The Yen went through the roof, surging to 131.00, while the EUR remained static above 1.0600.
RBA minutes were released yesterday, confirming the bank considered leaving rates unchanged, raising by 25 basis points and even raising by 50 basis points. The RBA is very risk averse and took the path of least resistance, raising 25 basis points. They recognised the inflationary pressures and the need to contain them, but are afraid of raising rates too high with a highly indebted nation. If the RBA followed the Fed, they would almost certainly face a crash in the real estate market and a recession. Time will tell and history will judge their reticence. The NZ economy is not faring well, with a shocking Business Confidence number released yesterday. Business Confidence plummeted to minus 70.2, the lowest level since records began and this closely follows a Consumer Confidence number, with a similar result. Consumer Confidence collapsed to an all time record low, when released the previous day, reflecting the sentiment of business and the consumer The NZD drifted lower to trade above 0.6300, but red flags are fluttering in a strong wind, while the AUD fell back below 0.6700.