Uncertainty Reigns Yet Little Has Changed – Currency Thoughts
Uncertainty Reigns Yet Little Has Changed
April 16, 2026
The Middle East’s future evolution remains unclear. Both sides want to avoid a resumption of the fight but still can’t find mutually acceptable terms for an extended peace. Equally uncertain is the economic repercussions of the war, which will be felt in most countries but in asymmetric ways. Barring a fresh turn for the worse, investors are reluctant to remain in grim, especially if that means missing the AI bonanza.
Japan’s Nikkei-225 equity index leaped 2.4% today to a record high of 59,518. To put that level in perspective, it took until February 2024 for the index to surpass a record high of 38,916 hit on the last business day of 1989. Since accomplishing that feat, the Nikkei has advanced 53% in just over two years. To be sure, Japan is a special case, with a low central bank interest rate of 0.75% and a weak yen increasing the incentive to tighten monetary policy soon. Another central bank seen closer than most to raising its interest rates is the Reserve Bank of Australia, whose officials have been increasingly outspoken is expressing disappointment with the higher-than-expected pace of that economy’s inflation.
Prior to the war in the Middle East, the bias of future interest rate changes at most central banks had been downward, but that dynamic has been antiquated by the conflict. the new confusion is addressed in published minutes today of the European Central Bank’s policy review last month.
In view of the exceptional uncertainty surrounding both the evolution of the war and the medium-term inflation outlook, the option value of waiting was high on this occasion, and it was therefore appropriate to leave policy rates unchanged. Given that the current policy stance was broadly neutral and the next monetary policy meeting was only six weeks away, the well-established meeting-by-meeting approach still left the Governing Council with sufficient flexibility to react at short notice if necessary. It was also in line with the data-dependent approach, as it would allow more time for the Governing Council to see how the war evolved, understand the magnitude and persistence of the shock and monitor the scale of potential second-round effects before taking action.
Overnight net dollar changes this Thursday have been minimal. The same can be said about the prices of precious metals and oil. Ten-year sovereign debt yields fell four basis points in Germany, France, Italy and Spain, two bps in Switzerland and the U.K, and a basis point in the United States and Japan. Alternatively, Australia’s 10-year yield is two basis points higher today.
Among Pacific Rim stock markets other than the aforementioned Japan, share prices climbed also climbed over 1% today in South Korea, Taiwan and Hong Kong and closed up 0.7% in China where several data were reported. Stock markets in Germany, France and the U.K. around 12:30 GMT were each up 0.6%, and U.S. stock futures had firmed but just marginally.
Central bank intervention in the early days of market-determined flexible exchange rates was a fact of life in the early years of the 1973 abandonment of fixed dollar parities but long ago fell out of favor except in a few occasions. The 160 yen per dollar level has acquired red line status, and so lately has hovered very close to but on the yen-strong side of that barrier. Japanese officials have threatened intervention but thus far not actually confirmed the conduct of such operations. Swiss officials correctly and repeatedly complain about the franc’s overvalued position and therefore include the right to use intervention to counter that tendency as a basic pillar of their monetary policy.
Among Chinese economic data reported today,
- First quarter GDP advanced 1.3% on quarter (most since 4Q 2024) and accelerated a half-percentage point to a 3-quarter year-on-year rate of 5.0%. Each comparison was somewhat higher than markets were anticipating.
- The year-on-year 1.7% rise in Chinese retail sales in March was lower than the market consensus forecast.
- Alternatively, industrial production on-year growth of 5.7% in March and 6.1% in the first quarter beat expectations.
- Fixed asset investment growth of 1.7% was a bit lower than forecast but better than the full-2025 contraction of 3.8%.
- China’s 5.4% jobless rate last month followed 5.3% in February and 5.1% in the final quarter of 2025, and its was the highest reading in thirteen months.
- House prices were 3.4% lower than a year earlier in March extending the streak of on-year declines to 33 months and to 45 of the past 47 months.
U.S. industrial production contracted 0.5% last month even though the war is being fought on someone else’s soil. Not only did that drop disappoint analyst projections of a marginal rise, but it was the weakest reading in 15 months and resulted in a 9-month low year-on-year increase of only 0.7%. Capacity utilization slid 0.4 percentage points to 75.7% in March. Greater U.S. economic strength were implied by other data out today showing a 15-month high in the Philly Fed manufacturing index and and 11k decline last week to just 207 new jobless insurance claims.
Several British economic indicators were also reported this Thursday. First, British industrial production rose 0.5% in February, easily beating expectations. While factory output dipped 0.1%, construction climbed 1.0%. Secondly, monthly GDP advanced 0.5% in February, most in 25 months and lifting the year-on-year growth rate to a 5-month high of 1.0%. Thirdly, the goods and services trade balance returned to deficit in February of 0.7 billion pounds following January’s surplus of GBP 3.22 billion. A merchandise trade deficit of GBP 33.9 billion in the first two months of 2026 was similar to that of GBP 32.6 billion a year earlier.
Euroland CPI inflation in March was revised upward by 0.1 percentage point to 2.6%, as energy climbed 7.0% on month (most in 41 months) and 5.1% on year (most in 37 months). Core inflation of 2.3% was left unrevised.
Combined producer price and import price inflation of -2.7% last month in Switzerland matched February’s reading and the most deflationary point since May of 2023. Domestic producer prices and import prices were respectively 2.4% and 3.2% below year-earlier levels.
Finally, Australian labor market statistics for the month of March were released, showing a jobless rate of 4.3%, matching February and two of the four readings before that. Employment growth slowed to 17.9k, and labor market participation ticked down 0.1 percentage point to 66.8%.
Copyright 2026, Larry Greenberg. All rights reserved.
Tags: Chinesequarterly GDP and monthly economic data, ECB minutes, Euroland CPI inflation, U.S. and British industrial production
ShareThisYou can leave a response, or trackback from your own site.
